December 17, 2015
Most of the readers can easily identify the number of days remaining to Christmas, but how many days to the New Year? Why is that important? Because for most of us it is perhaps the last opportunity to do some tax planning for 2015 and 2016. Although for most of us the focus is on 2015, the possibilities that potential future transactions could be accelerated to impact 2015 rather than 2016 should not be ignored.
Year end tax planning tactics include postponing income when possible and accelerating deductions. If employed, possibly you could postpone year-end bonuses and maximize deductible retirement contributions. Retirement plan distributions should be reviewed to be certain that you have drawn the minimum required because the penalty for not doing so is rough.
You will remember my reference to 2016. Many of you are already aware of significant salary increases to come in the next year, so that the advice in this first paragraph can be reversed. You might want to accelerate income and postpone electable deductions. Isn’t tax planning fun?
Nevertheless, it is essential for most of us to recognize a responsibility to be aware of, and plan within, our tax circumstances. Many of us have investments, and within the year as a result of managing those investments we have gains and losses. To the extent the losses realized exceed the gains we should review our portfolio for possible appreciated items that make sense to sell at this time to offset the losses. However, if at the final close the losses exceed the gains, the losses can be carried to the next year so we should never just sell because there is a loss to offset. And because gains that are long-term are taxed at a favorable rate of 15 or 20 percent, the opposite advice is true; selling good investments just because they now show a loss is not advisable just to offset the gain.
Accelerating deductions can also provide some relief. Charitable contributions, real estate taxes, and mortgage interest can all be accelerated or prepaid within certain limitations. However, many of these personal itemized deductions that we have become accustomed to over the years can also be a trap. Many of these deductions are added back in the calculation of the alternative minimum tax. So accelerating the deduction may possibly be counter-productive.
Perhaps getting rid of income producing assets would be appropriate. An individual can give away $14,000 at current value per year per recipient free of gift tax, and a married couple can double that amount. Naturally, there are many rules pertaining to gift giving that must be followed. Giving publicly traded investments with a long-term capital gain directly to a charity also should be considered. The benefit of this gift is that there will not be a tax on the gain, but a deduction for the full fair market value is allowed for tax purposes.
The Affordable Care Act requires that you have minimum essential health coverage or make a shared responsibility payment. If you think you may be liable for a shared responsibility payment, carefully review the significant number and variety of exemptions available. Remember, if liable for the shared responsibility payment, that number for 2015 is the greater of $325 or 1% of filing threshold for the filing status, up from the $95 for 2014.
Businesses also have questions and choices at year end. Aggressively pursue collections or defer? Prepay expenses or not? Is a piece of equipment aging and will need to be replaced soon? Buy it and place it in service before year end? There are currently some uncertainties about whether Congress and the President will pass any depreciation-acceleration bills effective for the 2015 tax year, but there is a reasonable likelihood they may do so.
Likewise, there are a number of other business oriented items of deductions or credits that expired at the end of 2014 and will likely be extended for 2015.
As I have often ended this column, stay tuned. Also, consult your tax advisers for clarification and to have a plan in place.
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