Tax time—again. So, with less than a month left in the year, it’s time to review what you have done so far, make any changes/corrections you can, and plan for 2016.
As we do each year, we will present you with some basic strategies you should consider at this point depending on your business or personal circumstances:
1. Talk to your tax guy. Make sure you have been paying enough or worse make sure you haven’t been overpaying and make the necessary adjustments.
2. While you are talking to your tax preparer, ask about any new laws on the horizon that may affect you next year. Specifically, both individuals and businesses should know about the new requirements and responsibilities related to the Patient Protection and Affordable Care Act (PPACA).
3. Start gathering and organizing your records; reconcile your bank account; pay medical, property tax, estimated tax installments, or other tax deductible items; make those last minute charitable donations. Essentially pay or delay depending on your personal situation. See number 1 above.
4. If you are a business, make sure you have all of your employee records and that they are correct; make sure you have tax ID numbers for contractors and their correct addresses.
5. Another suggestion for businesses—order whatever forms you need now so that they will be onsite when you need them.
Let’s start with individuals. First, your tax strategies should take into consideration what is known as “life cycle changes.” Before you talk to your tax preparer, take a look at this list and determine if any of the following apply to you.
• Change in filing status: marriage, divorce, death, or head of household changes
• Birth of a child
• Child no longer young enough for child credit
• Child has outgrown the “kiddie” tax
• Casualty losses
• Medical Expenses
• College and other tuition expenses
• Employment Changes
• Personal Bankruptcy
• Large inheritance
• Business success or failure
So far all of this is pretty standard, but important nonetheless. Here are some other issues that may affect you directly or indirectly.
Once again, Congress is still on the fence regarding temporary tax incentives. The individual incentives that may not be available without Congressional action include: state and local sales tax deduction, special mortgage debt forgiveness (think foreclosures and short sales), higher education tuition deduction, residential energy property credit, and teachers’ classroom expense deductions.
Affordable Care Act (ACA)
You are required, unless exempt, to carry minimum essential health insurance coverage each month of 2015 or make an individual shared responsibility payment. If you are liable for a shared responsibility payment, you will make it when you file your 2015 tax returns. If you obtain health insurance coverage through the ACA Marketplace you may be eligible for the Code Sec. 36B premium assistance tax credit which will offset the cost of your coverage.
For 2015, the individual shared responsibility payment is the greater of 2% of household income that is above the tax return filing threshold for the individual’s filing status, or the flat dollar amount which is $325 per adult and $162.50 per child with a family maximum of $975. Although open enrollment through the Health Insurance Marketplace has closed, certain situations may qualify you for special enrollment
For individuals, income tax rates remain unchanged from 2014: 10, 15, 25, 28, 33, 35, and 39.6%. The top tax rate for capital gains and dividends also remains the same as 2014 at 20%. Tax rates for qualified (net long-term) capital gains and dividends are also unchanged for 2015 ranging from 20% for those in the 39.6% income tax bracket to 15% for those within the 25-35% brackets. The rate is zero for those in the 10-15% income tax brackets. Be careful to avoid any spike in income (capital gains or ordinary) that would push higher income taxpayers into higher bracket. Whenever you can spread income over two or three years, do so.
Taxpayers with qualifying income may be liable for the 3.8% net investment income (NII) tax. The thresholds remain unchanged at:
• $250,00 for joint returns or a surviving spouse
• $125,000 for a married taxpayer filing separately
• $200,000 in all other cases
If you think you may fall into the NII liability category, consider keeping income below the thresholds if possible by taking itemized deductions or spreading the income over a number of years. Also keep in mind that NII includes income from a business where you may be a passive participant. Rental income may also be considered NII
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) exemptions for 2015 are $53,600 for single individuals and heads of household; $83,400 for married couples filing a joint return and surviving spouses; and $41,700 for married couples filing separate returns.
If you have a “qualified” retirement plan, including IRAs, be aware of your required minimum Distribution (RMD) beginning date. The RMD is based on the balance on December 31 of the calendar year before the distribution and the distribution must take place by December 31 of the following year.
Gift and Estate Taxes
The maximum federal unified estate and gift exclusion amount for 2015 is $5.43 million ($10.86 million for couples) for gifts and estates of decedents who died after December 31, 2012. The amount remains unchanged that a taxpayer can give of up to $14,000 to any individual, gift-tax free without counting the amount of the gift toward the lifetime for 2015 is $5.43 million exclusion (adjusted for inflation). There is no limit to the number of individual donees and spouses can split their fits to each donee. This raises the per donee annual maximum to $28,000.
For individuals who have abandoned U.S. citizenship or residency and later make a gift or bequest to a U.S. taxpayer, new regulations may apply. The IRS issued proposed regulations under the Heroes Earnings Assistance and Relief Tax Act of 2008 that applies to these transfers.
Year-End Business Tax Planning
To maximize tax benefits for 2015, businesses should consider traditional timing for income and deductions and response to recent IRS and court decisions that may change your tax planning strategies.
Congress provided a 50% bonus depreciations through 2014 and through 2015 for certain transportation and other property. We are still waiting for Congress to approve the extension and if they do, bonus depreciation can be elected on the 2015 return filed in 2016. Although you don’t have to make an immediate decision on the use of the bonus, the property must be purchased and placed in service in 2015. The bonus depreciation election is optional—much will depend on if the business wants to spread its depreciation deductions over time.
Repair Regulations – De Minimis Safe Harbor
Finally some good news for businesses!
Most businesses—especially smaller ones–want to write off costs quickly in order to reduce their taxable income. One way of doing this is to deduct the cost of property rather than capitalize. This can be a great tax planning opportunity for you. In November, the IRS raised the de minimis safe harbor threshold for businesses without applicable financial statements (audited financial statements or AFS) from $500 to $2,500. This relates to costs for acquisition, production of or improvement of tangible property that would normally qualify as a capital item. The safe harbor is only related to purchase of capital items so you can still claim deductible repair and maintenance costs even if they exceed the $2,500 threshold.
How does this affect you? In the past you could elect to expense any capital item that cost less than $500. Under the new, rule you can expense any capital item costing less than $2,500 per item (not total invoice). This is done on your tax return and is an annual election.
The IRS made the change in response partly to concerns that the $500 limitation was too low to “effectively reduce” the administrative burden of capitalization of smaller items, such as computers, smart phones, machinery, and equipment parts. The increased threshold is effective for tax years beginning on or after January 1, 2016.
For taxpayers with an AFS, the safe harbor applies to items costing $5,000 or less per item or invoice, and that are deducted on the applicable financial statement (AFS) in accordance with written accounting procedure and the items can be changed from year to year.
Warning: You must have a written policy in place at the beginning of the year that specifies a dollar amount for following book treatment. The de minimis can be changed every year and the election is made by filing a statement with your income tax return.
Research Tax Credit
This is one of the most popular extenders and it is likely it will be reinstated by Congress. The credit may be claimed for increases in business-related qualified research expenditures and increases in payments for research to universities or other qualified organizations.
The ACA’s employer shared responsibility requirements kicked in on January 1, 2015 and remains unchanged. There are exceptions for small and mid-sized employers for 2015 and “relaxed” standards for larger employers. Employers with fewer than 50 full-time employees (including full-time equivalent employees) are completely exempt from the employer mandate. If you have more than 50 full-time employees, but fewer than 100, you will be exempt from the mandate until 2016.
Congress did pass the Protecting Affordable Coverage for Employees (PACE) Act which maintains the current language in the ACA defined “small employer” as one with fewer than 50 employees. However it gives states the option to apply the original definition of small employer to employers with 51 to 100 employees for purposes of the small group health market. Employers need to check their individual state’s laws.
Some of the other business extenders awaiting Congressional approval:
• Work Opportunity Tax Credit
• Employer wage credit for activated military reservists
• Subpart F provisions
• New Markets Tax Credit
• Enhanced deduction for contributions of food inventory
• Low-income credits for subsidized new buildings and military housing
• Basis reduction of S corporation stock after donations of property
Also note some new filing deadlines for 2016 that may factor in to your planning strategies.
• Individual Tax Returns will be due April 18, 2016
• Uniform basis reporting requirements for estate tax property February 29, 2016
• FBARs due date going forward will be April 15 (from June 30)
• Maximum time to file an extension is now six months