2015 Year-End Tax Planning
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Highlights of tax changes and tax-savings strategies for 2015
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2015 Year-End Tax Planning
- 1. Year-End Tax Planning (2015) What Will Affect Your Return? www.wrightaccountingcpa.com
- 2. No Big Changes This Year www.wrightaccountingcpa.com 2 • Individual Taxpayers: - Affordable Care Act provisions taking effect - 2015 Tax Rates, NIIT and AMT - Deductibles and other tax-reduction moves - Education-related deductions • Small Business Owners: - Depreciation - ACA nuances - Home office deduction - State and local taxes
- 3. Affordable Care Act Provisions 3 • Fee increase for uninsured - 2016: Higher of 2.5% of yearly household income or $695 per person ($347.50 per child under 18) • Premium Tax Credit - Household income between 100% and 400% of federal poverty line www.wrightaccountingcpa.com
- 4. Health Care Reimbursement Arrangements (HRAs) – Know The Rules • Funded solely by employer • Can be used with any health plan - Not just high deductible • No annual limit • Must be used along with a health plan - Stand-alone HRA no longer compliant 4 www.wrightaccountingcpa.com
- 5. 2015: No New Tax Brackets 5 RATE SINGLE MARRIED (JOINT) HEAD OF HOUSEHOLD 10% $0–$9,225 $0–$18,450 $0–$13,150 15% $9,226–$37,450 $18,451–$74,900 $13,151–$50,200 25% $37,451–$90,750 $74,901–$151,200 $50,201–$129,600 28% $90,751–$189,300 $151,201–$230,450 $129,601–$209,850 33% $189,301–$411,500 $230,451–$411,500 $209,851–$411,500 35% $411,501–$413,200 $411,501–$464,850 $411,501–$439,000 39.6% $413,201 and up $464,851 and up $439,001 and up www.wrightaccountingcpa.com
- 6. Dividend and Capital Gains Rates Unchanged • The top tax bracket for dividends and capital gains is 20% (23.8% if net investment income applies). Here’s the breakdown: 6 0% for taxpayers in 0–15% tax brackets 15% for taxpayers in middle-income tax brackets 20% for taxpayers in the highest tax bracket (39.6%)
- 7. Quick Review of Net Investment Income Tax (NIIT) Additional 3.8% tax • Affects individuals, estates and trusts with income above certain thresholds • Capital gains, interest and dividends • Rental and royalty income • Medicare surcharge of 0.9% may also apply to wages, compensation and self-employment income
- 8. Alternative Minimum Tax (AMT) 8 • Created to close loopholes exploited by the wealthy • How does it work? - Adds back certain non-taxable income and removes some deductions - Re-computed income is then multiplied by a flat rate = AMT • Higher of AMT or regular tax is paid • Very complex to calculate
- 9. AMT – Good and Bad News 9 • Good news: - Higher exemption - Indexed for inflation • Bad news: - Income levels not increased • Possible pitfall: - Triggering AMT when taking certain tax breaks • AMT exemption for 2015: - $53,600 (Single/head of household) - $83,400 (Married filing jointly)
- 10. Personal Exemptions 10 • 2015: $4,000 per eligible person • Phase-out: - Single: $258,250 - Married filing jointly: $309,900 - Head of household: $284,050 - Married filing separately: $154,950
- 11. Itemized Deductions 11 • Limited for high-income taxpayers • 3% reduction once AGI exceeds threshold • Reduction never goes below 20% • Exceptions for certain deductions include: - Medical expenses - Investment interest - Casualty or theft losses
- 12. Tax Benefits in Limbo 12 • Sales tax vs. state income tax deduction • Private mortgage insurance • Teacher expenses • Qualified tuition • Employer-provided transit benefits • Discharge of principal residence debt (short sales)
- 13. Retirement Planning 13 • 401(k)/403(b): - $18,000 + $6,000 for over 50 • IRA: - $5,500 + $1,000 for over 50 • Roth IRA: - Anyone can convert, regardless of income
- 14. Estate and Gift Taxes 14 • 2015 estate tax exemption: $5.43 million • Top rate is 40% • 2015 gift tax annual exclusion: $14,000 • Estate planning is more than minimizing estate taxes - Outdated documents - Repurposing insurance - Privacy - Asset protection
- 15. Education Tax Credits 15 • American Opportunity Tax Credit - In effect until 2017 - Up to $2,500 for first 4 years post-secondary school • Lifetime Learning Credit - Up to $2,000 for all post-secondary expenses • Tuition and Fees Deduction - If extended into 2015
- 16. More Education Incentives • Employer-provided assistance: $5,250 • Student loan interest: $2,500 • Education savings accounts: $2,000 16
- 17. Last-Minute Planning Tips 17 • Pre-pay deductible expenses before Dec. 31 - Tuition due in January - 4th quarter state estimates • Harvest capital losses • Maximizing out retirement savings • Avoid mutual fund purchases in December • Gift appreciated stock • Don’t forget your flexible spending account (FSA)
- 18. Capital Loss Harvesting • Sell down positions to offset income • Avoid wash-sale rule • Loss limited to $3,000 per year 18
- 19. Top Issues for Small Business 19
- 20. Depreciation Expense 20 • Section 179 expense limit — waiting on Congress to make a final decision - 2015: $25,000 unless Congress acts - Note: Bill passed by the House makes permanent the $500,000 limit (waiting to see if this becomes a law)
- 21. SHOP Marketplace 21 • Employers with 50 or fewer full-time equivalents (FTEs) can participate in the SHOP Marketplace • Small businesses can qualify for a credit: - Fewer than 25 full-time equivalents - Average annual wages less than $50,000 - Contribute 50% or more to employee premiums
- 22. Home Office Deduction • Two rules define who can take a deduction • Regular method: Actual expenses • Simplified method: - $5 per square foot of home used for business (maximum 300 square feet) 22
- 23. Saving for Retirement 23 • Savings Incentive Match for Employees (SIMPLE) • Simplified Employee Pension (SEP) plans • Profit-sharing plans • A variety of 401(k) plans
- 24. State and Local Taxes 24 • Beware of withholding, filing and payment obligations if you operate in multiple states • Sales tax rules vary: - Type of product - Different counties and municipalities
- 25. Planning Opportunities 25 • Complexity = possible savings opportunities • A CPA can help
- 26. Protect Yourself from Identity Theft • Individuals - Protect your information - Shred your mail - Don’t be fooled by “phishing” - Check your credit report regularly annualcreditreport.com - Contact all three reporting agencies as soon as you have a breach - identitytheft.gov • Businesses - Only collect what you need for as long as you need it - Secure your network - Train and restrict access - Audit regularly 26
- 27. Questions © 2015 American Institute of CPAs. All rights reserved. 18143-312 www.wrightaccountingcpa.com E-mail Dillon Wright
Editor's Notes
- Hi, my name is [insert name], and I’m with [firm name]. Thank you for the opportunity to share a few tax updates that took affect this year and some tax planning you can do now to save on your 2015 income taxes.
- So far this year, there are no big tax changes, which is typical when we are coming upon an election year. There has been a lot of noise in the news with the President’s proposed budget, but until laws are passed by Congress, these provisions are just talk. Today we’re going to be covering a few updates and hot topics as well as some planning tips to help minimize this year’s tax burden for you.
- The two biggest updates this year have to do with the Affordable Care Act (ACA). First, the fee or penalty for NOT having health insurance increased in 2015, so uninsured will now pay a fine of the higher of 2% of income or $325 per uninsured person ($162.5 per child under 18). The fee goes even higher in 2016 to 2.5% or $695 per person ($347.5 per child under 18), so taxpayers who opted not to pay premiums in 2015 may need to reevaluate that choice in 2016. For future years, the fee will increase with inflation. Open enrollment for 2016 starts November 1 and runs through January 31, 2016. The Premium Tax Credit (or “PTC”) applies for low-income families who purchased health insurance through their state-run exchanges. The amount varies and can be used to reduce premiums or as a credit on a taxpayer’s return. Visit healthcare.gov for more information.
- Health Reimbursement Arrangements, or HRAs, are employer-funded, tax-advantaged health benefit plans that reimburse employees for out-of-pocket medical expenses – employers often use these to ease the burden of selecting a high deductible health plan for employees in an effort to cut overall healthcare benefit costs. However, as of 2014, stand-alone plans, or those that were used to reimburse employees who were purchasing their own insurance plans, are no longer compliant with current healthcare laws under the Affordable Care Act. Employers participating in the SHOP program can use HRAs to reimburse employees for out-of-pocket expenses, however.
- For tax year 2015, marginal income tax brackets are expanded slightly above 2014, with the highest rate still being 39.6%, which was introduced in 2014.
- Capital gains rates also stay the same, with the highest income taxpayers paying 20% on capital gains while also facing the net investment income tax of 3.8% on top of that. If you sold stocks or earned dividends, this could affect you.
- The net investment income tax (NIIT) went into effect on Jan. 1, 2013, but if you took advantage of this year’s stock market highs and realized capital gains, you could be seeing this tax for the first time. The income thresholds are lower than the other tax brackets - $200,000 for single or head of household taxpayers and $250,000 for married filing jointly taxpayers. If your income exceeds this amount AND you have investment income, you could be paying an additional 3.8% on the overage. Assets that are subject to the tax include stocks and bonds, certificates of deposit and mutual funds — both capital gains from the sale of these assets and any earnings (interest or dividends) from them. The 0.9% Medicare surcharge applies to wages, compensation and self-employment income above a threshold amount. Once again, planning can play a critical role in minimizing tax.
- Although the AMT was originally aimed at high-income taxpayers, due to a lack of sufficient indexing for inflation, it has increasingly affected more and more middle-income taxpayers over the years. Basically if your income exceeds a certain amount, you may have to add back certain deductions, then recalculate your tax according to AMT rules. You’ll pay whichever amount is higher. The only good news is that if your income drops in a future year to below the AMT threshold, you may be able to apply previously paid AMT as a credit.
- Despite a lack of indexing for inflation for many years, the AMT exemption is now being indexed annually. This change, which was part of the American Taxpayer Relief Act of 2012, is intended to reduce the number of taxpayers affected, but taxpayers still need to engage in careful tax planning to avoid triggering the AMT when taking some tax breaks. What was once thought to be a tax on the wealthy surprises more and more average taxpayers even with increased exemption amounts.
- The personal exemption is provided for the taxpayer, spouse and all eligible dependents, with no limit to the number of dependents you can claim and regardless of whether you itemize deductions. However, it is key to note that these exemptions do phase out for higher-income taxpayers so if your income exceeds the amounts shown here, you won’t be able to take these exemptions. This is based on your adjusted gross income, so the amount isn’t affected by deductions such as charitable contributions or mortgage interest, but could be reduced by self-employed health insurance premiums, student loan interest, IRA contributions or certain other “above the line” deductions.
- Many taxpayers attempt to max out itemized deductions as a core tax reduction strategy, but it’s important to understand that not all deductions are the same. For example, medical expenses must exceed 10% of your adjusted gross income before you receive any deduction and investment interest, legal fees or even tax preparation fees must equal more than 2% of your AGI to be deducted. And high-income taxpayers could have their overall itemized deductions limited, which negates the benefit of some tax-reduction strategies. It is important to plan ahead and speak to your adviser before making any big decisions. There may be alternatives which will provide a better tax outcome, but cannot be undone. It also is important to ensure that all criteria is met for deducting items, such as proper documentation, rights of ownership, etc. This is especially important if you’re planning a significant gift to charity, particularly if you’re gifting a non-cash item.
- Every year we wait until the 11th hour for Congress to decide whether to extend certain tax provisions that expired at the end of the previous year. One year we even waited until New Year’s Eve! It remains to be seen whether these provisions will be retroactively extended through 2015, but if you COULD qualify, be sure to track these items in case.
- 401(k) contribution limits were increased for 2015 along with the catch-up amount for taxpayers over age 50. IRA contribution limits remained the same. Roth IRAs still have income limits on who can contribute to the accounts, but there is a nice loophole that allows anyone to convert a traditional IRA to a Roth IRA, which allows the funds to grow tax-free and also be withdrawn tax-free. Remember that if you choose to convert traditional IRA assets or roll a 401(k) into a Roth IRA, you will have to pay income taxes on the amount your converted that year. However, one loophole that is bound to be closed soon is what’s known as the “back-door Roth IRA.” Essentially, you deposit your funds into a traditional IRA but then the next day do a conversion. There will be no tax consequence as you’ll be using after-tax money, so this is just a way to get around the income limits for higher-income taxpayers who wish to contribute to a Roth.
- The American Taxpayer Relief Act (ATRA) simplified estate taxes for federal purposes, but that doesn’t mean you don’t need to do estate planning if you’re worth less than $5 million. Many states have much lower thresholds and proper planning can alleviate some of the burden. If you’ve had any significant changes in your family, such as a birth, marriage, divorce or death, it’s important to revisit your estate planning documents to make any necessary changes.
- The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit are just that: credits, which are much more favorable than deductions. These provisions reduce the taxes you pay dollar for dollar. The AOTC is even refundable, meaning that you could receive up to $1,000 in a refund by using this credit. If you don’t qualify for either credit, you may still be able to take a deduction for qualified tuition and expenses if Congress extends it again for 2015.
- Three education-related tax incentives were made permanent: - If your employer reimburses you for tuition, the first $5,250 per year is tax-free. After that, it is considered taxable income, so be aware of that if you take advantage of workplace tuition reimbursement programs. - The student loan interest deduction can be taken as many years as you are paying it, which is a nice boost from the old five-year limit. You can deduct up to the first $2,500 in interest paid each year. - Finally, education savings accounts (ESAs), which are sometimes called “Coverdell,” allow up to $2,000 per year to be contributed. The big difference between ESAs and 529 plans (besides the low limit) is that ESAs can be used for private primary, middle or high school. So if you’re planning to send your kids to private school and want to save with tax-free earnings, an ESA probably makes sense.
- While it’s illegal to evade taxes, it’s perfectly legal to avoid them. If 2015 was a higher-income year for you, there are some steps you can take before the end of the year to reduce your taxable income. If you have a tuition bill or state estimated tax payment due in January, consider paying it this year so you can take the deduction right away. And while it’s a poor investment strategy to let the tax tail wag the investing dog, if you are planning to liquidate any taxable securities in the near future, consider selling any that are at a loss if you have gains so far this year. If you haven’t maxed out your 401(k), call payroll to make it happen. You also have until April 15th to fully fund your IRA. Mutual funds are required to pay out capital gains to investors, and even though the payout is considered a return of capital for fund pricing purposes, you do have to pay taxes on this “phantom income.” If you’re thinking about getting into a fund, wait until after that year-end distribution happens to save yourself from a nasty tax surprise. If you’re planning cash gifts this year to family OR charity, consider transferring appreciated stock instead – this removes the capital gain from your income and you’ll get the fair market value deduction for the charitable gift. Finally, if you participate in your company’s flexible spending account (FSA) program, make sure you spend down any remaining funds. You’re allowed to roll up to $500 into next year, but anything over that is gone forever unless you spend it on qualified expenses AND claim it.
- Taxpayers should be aware of the Health Insurance Marketplace enrollment window. Those who do buy their insurance in the marketplace should carefully evaluate their options and make sure they’re making apples-to-apples comparisons of different plans, since coverage may vary.
- Though currently the Section 179 limit for 2015 is $25,000, we are optimistic that the limit will be raised (perhaps permanently) to $500,000. America’s Small Business Tax Relief Act of 2015 (H.R. 636) passed on Feb. 13, 2015 in the House. This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. We’re waiting to see if this bill becomes law (it still needs to be approved by the Senate and signed by the President).
- The Small Business Health Options Program (SHOP) Marketplace helps small businesses provide health coverage to their employees. The SHOP Marketplace is open to employers with 50 or fewer full-time equivalent employees (FTEs), including non-profit organizations. You can enroll in SHOP at any point throughout the year. Note: If you're self-employed with no employees, you can get health coverage through the Health Insurance Marketplace for individuals, but not through SHOP. You may qualify for employer health care tax credits if you have fewer than 25 FTE employees making an average of less than $50,000 a year, and you pay at least 50% of your full time employees’ premium costs …
- Many taxpayers opt not to take the home office deduction because it could be a "red flag" for an audit. And while the rules must be followed, this deduction can be a substantial tax savings vehicle for both regular and self-employment income if you are eligible. Taxpayers who rent their home can realize a significant savings. The simplified method (sometimes called the safe-harbor method) of calculating the deduction, introduced in 2013, is an optional easier way to figure the deduction without the record-keeping requirement of the regular method (actual expenses). Mortgage interest and property taxes allocable to the home office are still permitted as an itemized deduction for those who use the new simplified method. However, the rules for determining what space qualifies as a home office still apply to both methods.
- Qualified retirement plans offer many tax benefits to both employers and employees and can be a valuable tool in retaining employees. With traditional plans, employers get a tax deduction for contributions, and employees may be allowed to make pre-tax contributions and defer taxes on income until distribution. In Roth plans, employees do not get tax deductions for contributions, but qualified distributions and withdrawals are tax-free. In addition, assets held in qualified plans generally are protected from creditors of both employees and employers. However, these plans are heavily regulated and include different contribution limits and matching requirements. Plans may have nondiscrimination requirements and top-heavy rules, which require their own tax-filing obligations. It’s also important to consider whether your business will grow to include more employees when you select your plan as some plans have limits on the number of participants.
- Many states disallow deductions that can be taken on a federal return and may tax income that is exempt from federal tax. For example, some states have more restrictive net operating loss carryover rules than the federal government and do not allow favorable tax treatment for long-term capital gains. At the same time, states also have their own set of credits and deductions that can help lower taxes.
- Before we move on to Q&A, I just want to make one final comment. So many things we do have tax consequences that we often don’t think about until it’s too late — changing jobs, having children, planning for retirement, exercising stock options, receiving a promotion with a nice raise, opting into an employer-provided retirement plan like a 401(k), transitioning parents into long-term care — I could go on, but you get the idea. Today, we touched on the major topics at a very high level, but with ever-changing tax laws and changes to your particular situation, it is always a good idea to review how the tax laws affect you. That is where we can help. It is what we do year-round. We can answer quick questions or provide an in-depth tax projection to help you anticipate how these new tax laws will affect your returns. So, don’t hesitate to reach out to us after today’s presentation if you’d like to discuss something in more detail. And with that, we’ll move on to Q&A and take any questions you have (Note to Presenter: After this last statement, move forward to the next slide and open up the floor for participant questions).
- There is no surefire way to prevent your identity from being stolen – even if you choose not to use online banking, shopping or data storage, your information is out there, as we know from recent news stories on hackers accessing insurance companies, retailers and even the IRS. The best thing you can do as an individual is learn how identity theft happens and know what to do if it happens to you. Don’t make it easy for thieves to steal your information – shred credit card offers and account statements and protect your Social Security number as if it is your most prized possession. Business owners, do your best to protect your customer’s information to avoid potential loss of trust should your system be hacked. Only collect and retain the information you need and be sure you dispose of your customer’s data safely as well. Make sure that sensitive personal information is only available to those who need it and that employees are properly trained on the importance of their part in protecting customer information.
- Thank you! It was a pleasure being with you today and I welcome you to contact me with questions anytime! We would love the opportunity to talk with you about how we can be of service.