2015 Year-End
Planning Moves:
· Realize
losses on stock while substantially preserving your investment position. There
are several ways this can be done. For example, you can sell the original
holding, then buy back the same securities at least 31 days later.
· Postpone
income until 2016 and accelerate deductions into 2015 to lower your 2015 tax
bill. This strategy may enable you to claim larger deductions, credits, and
other tax breaks for 2015 that are phased out over varying levels of adjusted
gross income (AGI). These include child tax credits, higher education tax
credits, and deductions for student loan interest. Postponing income also is
desirable for those taxpayers who anticipate being in a lower tax bracket next
year due to changed financial circumstances.
· Consider
converting traditional-IRA money invested in beaten-down stocks (or mutual
funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a
conversion will increase your AGI for 2015.
· If
you converted assets in a traditional IRA to a Roth IRA earlier in the year and
the assets in the Roth IRA account declined in value, you could wind up paying
a higher tax than is necessary if you leave things as is. You can back out of
the transaction by recharacterizing the conversion, transferring the converted
amount (plus earnings, or minus losses) from the Roth IRA back to a traditional
IRA via a trustee-to-trustee transfer.
· Use
a credit card to pay deductible expenses before the end of the year. This will
increase your 2015 deductions, even if you don’t pay the bill until 2016.
· If
you expect to owe state and federal income taxes when you file your return next
year, ask your employer to increase withholding of state and federal taxes (or
pay estimated tax payments of state and federal taxes) before year-end to pull
the deduction of those taxes into 2015 if you won’t be subject to the
alternative minimum tax (AMT) in 2015.
· Estimate
the effect of any year-end planning moves on the AMT for 2015, keeping in mind
that many tax breaks allowed for purposes of calculating regular taxes are
disallowed for AMT purposes. These include the deduction for state property
taxes on your residence, state income taxes, miscellaneous itemized deductions,
and personal exemption deductions. Other deductions, such as for medical
expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as
of the close of the tax year, are calculated in a more restrictive way for AMT
purposes than for regular tax purposes. If you are subject to the AMT for 2015,
or suspect you might be, these types of deductions should not be accelerated.
· You
may be able to save taxes by applying a bunching strategy to “miscellaneous”
itemized deductions, medical expenses, and other itemized deductions.
· Take
required minimum distributions (RMDs) from your IRA or 401(k) plan (or other
employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of
the year following the year you reach age 70- 1/2. That start date also applies
to company plans, but non-5% company owners who continue working may defer RMDs
until April 1 following the year they retire. Failure to take a required
withdrawal can result in a penalty of 50% of the amount of the RMD not
withdrawn. If you turned age 70- 1/2 in 2015, you can delay the first required
distribution to 2016, but if you do, you will have to take a double
distribution in 2016, the amount required for 2015 plus the amount required for
2016. Think twice before delaying 2015 distributions to 2016, as bunching
income into 2016 might push you into a higher tax bracket or have a detrimental
impact on various income tax deductions that are reduced at higher income
levels. However, it could be beneficial to take both distributions in 2016 if
you will be in a substantially lower bracket that year.
· Increase
the amount you set aside for next year in your employer’s health flexible
spending account (FSA) if you set aside too little for this year.
· Make
gifts sheltered by the annual gift tax exclusion before the end of the year and
thereby save gift and estate taxes. The exclusion applies to gifts of up to
$14,000 made in 2015 to each of an unlimited number of individuals. You can’t
carry over unused exclusions from one year to the next.
Tax Factors for Consideration:
Higher-income earners
have unique concerns to address when mapping out year-end plans. They must be
wary of the 3.8% surtax on certain unearned income and the additional 0.9%
Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals
for whom the sum of their wages received with respect to employment and their self-employment
income is in excess of an unindexed threshold amount ($250,000 for joint
filers, $125,000 for married couples filing separately, and $200,000 in any
other case). The surtax is 3.8% of the lesser of: (1) net investment
income (NII), or (2) the excess of modified adjusted gross income (MAGI) over
an unindexed threshold amount ($250,000 for joint filers or surviving spouses,
$125,000 for a married individual filing a separate return, and $200,000 in any
other case). As year-end nears, a taxpayer’s approach to minimizing or
eliminating the 3.8% surtax will depend on estimated MAGI and NII for the year.
Some taxpayers should consider ways to minimize (e.g., through deferral)
additional NII for the balance of the year; others should try to see if they
can reduce MAGI other than NII, and still other individuals will need to
consider ways to minimize both NII and other types of MAGI.
The 0.9% additional
Medicare tax also may require year-end actions. Employers must withhold the
additional Medicare tax from wages in excess of $200,000 regardless of filing
status or other income. Self-employed persons must take it into account in
figuring estimated tax. There could be situations where an employee may need to
have more withheld toward the end of the year to cover the tax. For example, if
an individual earns $200,000 from one employer during the first half of the
year and a like amount from another employer during the balance of the year, he
would owe the additional Medicare tax, but there would be no withholding by
either employer for the additional Medicare tax since wages from each employer
don’t exceed $200,000. Also, in determining whether they may need to make
adjustments to avoid a penalty for underpayment of estimated tax, individuals
also should be mindful that the additional Medicare tax may be overwithheld.
This could occur, for example, where only one of two married spouses works and
reaches the threshold for the employer to withhold, but the couple’s combined
income won’t be high enough to actually cause the tax to be owed.
Tax Breaks Not Extended, as of Yet:
Some of these tax breaks
ultimately may be retroactively reinstated and extended, as they were last
year, but Congress may not decide the fate of these tax breaks until the very
end of 2015 (or later). These breaks include, for individuals: the option to
deduct state and local sales and use taxes instead of state and local income
taxes; the above-the-line-deduction for qualified higher education expenses; tax-free
IRA distributions for charitable purposes by those age 70- 1/2 or older; and
the exclusion for up to $2 million of mortgage debt forgiveness on a principal
residence.
