To Our Clients and Friends:
It has been a relatively quiet year in the tax arena. As year-end approaches, it is time to focus on last-minute moves you can make to save taxes – both on your 2015 return and in future years. To get you started, we have outlined a few money-saving ideas that you may want to put into action before the end of this year.
As a reference, below is a table of the ordinary income tax rates for Married Filing Jointly taxpayers for 2015.
|Taxable Income||2015 Rate|
|$466,851 and Over||39.6%|
If you have appreciated stock or mutual fund shares that you have held for more than one year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock or mutual fund shares instead. You will avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. However, if the shares are now worth less than when you acquired them, sell them, take the loss, and then give the cash to the charity.
For 2015 the standard deduction is as follows:
|Married filing jointly||$12,600|
|Married filing separately and single||$ 6,300|
|Head of Household||$ 9,250|
If your total itemized deductions such as mortgage interest, real estate taxes, and charitable deductions each year are close to these amounts, you may be able to fully leverage the benefit of your deductions by bunching them into every other year. This allows you to deduct your itemized deductions in the years they are high and claim the standard deduction the following year, when your itemized deductions are low. For example, you may consider waiting to pay your 2015 real estate taxes until 2016. Real estate taxes are due by March. If you paid your 2015 and 2016 real estate taxes during 2016 you would get be able to get the benefit of two payments in one year and potentially reduce your 2016 tax liability.
Phase Out of Itemized Deductions and Personal Exemptions
Single filers with adjusted gross income (AGI) in excess of $258,250 or couples who are married filing jointly and have AGI in excess of $309,900 will also face phase outs of their deductions and personal exemptions. The phase out of the personal exemption means for every $2,500 of AGI (or portion thereof) above $258,250 ($309,900 for married couples filing jointly), the $4,000 per-person personal exemption will be reduced by 2%. For married couples, personal exemptions will be fully phased out once their AGI exceeds $432,400, or for single filers if AGI exceeds $380,750.
The phase out of itemized deductions could also raise tax bills for higher income earners by reducing the tax benefit of the mortgage interest, state income and sales tax, home office, and certain other itemized deductions. This limitation reduces the value of itemized deductions by 3% of the AGI above $309,900 for couples, and $258,250 for single filers—to a maximum reduction of 80% in value. Itemized deductions for certain medical expenses, investment interest, and for casualty, theft, or gambling losses are exempt from the phase out.
The long term capital gain rate for 2015 is based upon your total taxable income including capital gains and is as follows:
|Single||Married Filing Jointly||Rate|
|0 – $37,450||0 – $74,900||0%|
|$37,451 – $413,200||$74,901- $464,850||15%|
|$413,201 and Over||$464,851 and Over||20%|
High income earners have other factors to keep in mind when mapping out year-end plans. You will have to take into account the 3.8% net investment income surtax on unearned income. Unearned income is defined as interest, dividends, non-business capital gains, annuities, royalties, and passive rental income. Also, some taxpayers will be subject to the additional 0.9% Medicare tax which applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
Flex Plan for Child Care Costs
If your employer offers flexible spending accounts you can fund a maximum of $5,000 for the cost of dependent care with pre-tax dollars. The credit applies to as much as $6,000 of eligible expenses for filers with two or more children under the age of 13. The first $5,000 is not eligible for the child care credit but the additional $1,000 is available for the credit. Thus make sure we receive all child care costs to make sure we maximize your available credit.
Roth IRA for Child or Grandchild
If your child or grandchild had a summer job consider contributing to a Roth IRA this year. You can put up to $5,500 into an account, however the contributed amount cannot be more than what the child made during the year. Although not tax deductible it does jump start retirement. A $5,500 contribution earning 7% will grow to $151,000 at age 65 and $212,000 at age 70. Remember the earnings for a Roth IRA are tax free.
Congress has yet to act on a host of tax breaks that expired at the end of 2014. Some of these breaks may be retroactively reinstated and extended, but Congress may not decide the fate of them until either the end of 2015 or the beginning of 2016. These breaks include:
- The option to deduct state and local sales and use taxes
- The ability to deduct mortgage insurance premiums
- The above the line deduction for higher education expenses
- Tax free IRA distributions for charitable purposes by those 70-1/2 & older
- The exclusion for up to $2 million of mortgage debt forgiveness on a principal residence
- Energy-Efficient Home Improvements Credit
- School teachers’ supplies deduction
- 50% bonus first year depreciation for most new machinery, equipment, & software
- The $500,000 annual expensing limitation
- The research tax credit
- The 15 year write-off for qualified leasehold improvement property
Estate and Gift Taxation
During 2015 the maximum gift and estate tax exclusion is $5.43 million. The annual gift tax exclusion is $14,000. For 2016 the annual gift tax exclusion remains the same and the lifetime maximum gift and estate tax exclusion increases to $5.45 million.
If you become eligible to make health savings account (HSA) contributions in December of this year, or you have not contributed to an HSA during 2015, you can make a full year’s worth of deductible HSA contributions. Individuals can contribute up to $3,350 and families can contribute up to $6,650. Contributions for the 2015 calendar year can be made until April 15, 2016.
Finally, as a result of Obamacare additional reporting regarding health insurance will be required. We will be requesting additional information relative to your health insurance. Please retain any information you receive from your insurance company or employer. We will include the exact information in our tax checklist.
Also for Businesses, please note that if you do not offer a group health plan for your employees you may not reimburse workers for health care coverage for premiums paid for individual health policies or Medicare. There is an excise tax of $100 per day per employee beginning June 30, 2015.
Other than the tax extenders we do not foresee any other changes affecting your 2015 taxes. With a new Speaker of the House and a presidential election under way our belief is that no significant tax policy will come out of Washington until after the election. However we will continue to monitor the progress (or lack thereof) that congress is making. In the mean time please contact us if you want to discuss specific issues or if we can be of assistance.
Our office will be closed from December 21, 2015 through January 1, 2016 so that we can spend the Christmas holidays with our families. We wish each of you a Merry Christmas and peace and prosperity in the coming year.
Lee Anne Acosta
Founder & Partner