To Our Clients and Friends:
As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2015 return and in future years. This letter presents a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you. In addition, we have included some information to keep you updated on reporting changes to expect beginning in 2016 as well as other changes that will take effect in future years to be aware of.
Identity Theft Concerns
Nearly 3 million people were the victims of tax-related identity theft in the recent year. In a typical case, scammers use your social security number to get a fraudulent refund. You may not be aware that you have been a victim of identity theft until you attempt to file your own return and are told by the IRS that another return has already been filed in your name. Victims of these scams should respond immediately. We can offer advice on how to respond to any tax notice you receive; however, you can often foil scammers plans to claim a fraudulent refund in your name by filing a return early in the filing season.
We also want to remind you that the IRS does not contact taxpayers by email or telephone requesting personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PIN numbers, passwords or similar confidential access information for credit card, bank or other financial accounts. Do not confirm, verify or provide any information that scammers may ask of you.
Affordable Care Act
Affordable Care Act for Businesses. Employers need to be prepared to implement the Affordable Care Act provisions that take effect for the 2015 tax year. In general, employers with 50 or more full time equivalent employees will be subject to additional reporting requirements as will employers who have self-insured health insurance programs. If you are unclear about whether or not you might be subject to additional reporting please contact our office so we can discuss your individual situation in more detail.
Keep in mind other key changes enacted by the Affordable Care Act for tax years beginning in 2014. For example, health reimbursement arrangements (HRAs) and similar plans generally have been eliminated except when used for selected benefits, including dental and vision care, long-term care and disability coverage, in concurrence with a health insurance plan that covers minimum essential health care as defined by the provisions of the Affordable Care Act. While employers with less than 50 full time equivalent employees are not required to provide health care coverage for their employees, if they choose to do so, their plan must comply with the employer shared responsibility provisions of the Affordable Care Act.
Affordable Care Act for Individuals. Beginning in 2014, unless you are covered by an exemption, you are required to maintain basic health insurance coverage (known as minimum essential coverage) for yourself and any of your dependents, or pay a penalty. The penalty in 2015 is calculated one of two ways. If you or your dependents do not have health insurance that qualifies as minimum essential coverage you’ll pay the greater of $325 per uninsured person or 2% of your household income, capped at the national average premium for a bronze plan. The penalty increases every year. In 2016 and later years it will be 2.5% of income or $695 per person. After that it will be adjusted for inflation. If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you owe the penalty, it will be assessed on your 2015 income tax return which is due April 15, 2016.
If you had health insurance in 2015 your insurance provider, employer, or state health exchange should provide you with Form 1095-A or 1095-B which reports information to the IRS for each individual to whom the reporting entity provided minimum essential health insurance coverage as required by the Affordable Care Act. Maintain these forms for your tax records and reporting.
Tangible Property Regulations
Beginning in 2014, there are new regulations for the depreciation of tangible property. In many situations, items that were required to be depreciated over several years may now be required to be expensed in the current year. In addition, an annual election to expense certain purchases of new property might be available to your business. Now is a great time to discuss your capitalization policy with us to make sure that you are taking advantage of these new regulations for 2015 as well as future years.
Expired Tax Provisions
Several popular tax provisions expired at the end of 2014. Many of these provisions are routinely extended by congress on a one or two year basis. We expect the following tax provisions to be available for the 2015 tax year; however, as of the date that this letter, none have been extended through the 2015 tax year or beyond and you should carefully consider any decision to pursue a tax planning strategy that relies upon one of these currently expired tax provisions.
State and local sales taxes deduction. Election to deduct state and local general sales taxes instead of state and local income taxes.
Cancellation of debt (COD) mortgage debt. Exclusion of COD income (up to $2 million; $1 million if married filing separately) when principal residence debt is canceled.
Educator’s expenses. Above the line deduction (up to $250) for out of pocket costs incurred by grades K-12 teachers, instructors, counselors, principals and aides.
Section 179 deduction. For years after 2014, the deduction and qualifying property limits fall frhttp://www.clausencpas.com/news/wp-admin/post.php?post=12&action=editom $500,000 and $2,000,000 to $25,000 and $200,000, respectively. Also, off the shelf software no longer qualifies for Section 179 expensing.
Special (bonus) depreciation. The special depreciation allowance is not available for property acquired after 2014.
Work opportunity tax credit.
Tax credit for research and experimentation expenses.
Mortgage insurance premiums deduction. Treatment of qualified mortgage insurance premiums as home mortgage interest for taxpayers with AGI up to $109,000 ($54,500 if married filing separately).
Personal energy property credit. Credit (subject to a $500 lifetime cap) for qualified energy efficiency improvements and expenditures to a taxpayer’s principal residence.
Tuition and fees deduction. Above the line deduction for tuition and fees for qualified higher education expenses.
Qualified charitable distributions (QCDs). Ability for taxpayers over age 70 1/2 to make tax-free transfer from an IRA directly to a charity. Any amounts so transferred counted toward the individual’s required minimum distribution, but were not deductible as charitable contributions.
15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
General Strategies for Possible Tax Savings
Postpone income to 2016 and accelerate deductions into 2015. 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. These include child tax credits, higher education tax credits, and deductions for student loan interest. Postposing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
Defer a bonus. It may be advantageous to try to arrange with your employer to defer until 2016 a bonus that may be coming your way.
Contribute to an HSA. HSA contributions are a deduction to your adjusted gross income. For the calendar year 2015, a HSA holder can choose to save up to $3,350 for an individual and $6,650 for a family (HSA holders 55 and older can contribute an extra $1,000).
Harvest Capital Losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date.
Use of Credit Cards for deductions. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
Pay state and local income taxes earlier. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015.
Bunch medical expenses and miscellaneous itemized deductions. In 2015 unreimbursed medical expenses are deductible (if you itemize deductions) to the extent they exceed 10% of your AGI. If you have a shot at exceeding the 10% floor this year, you may want to accelerate into this year discretionary medical expenses, such as prescription glasses and sunglasses or elective, but deductible, medical or dental procedures not covered by insurance. Similarly, you can apply this strategy to certain miscellaneous itemized deductions such as unreimbursed employee expenses, tax preparation fees, and certain other expenses that are deductible (if you itemize deductions) to the extent they exceed 2% of your AGI.
Issues for Higher Income Earners
Phase-out of itemized deductions and personal exemptions. Itemized deductions and personal exemptions could be limited or reduced to nothing for higher income taxpayers. The phase-out begins for unmarried individuals with adjusted gross income at $258,250, heads of households with adjusted gross income at $284,050, married individuals filing joint returns with adjusted gross income at $309,900, and for married individuals filing separate returns with adjusted gross income at $154,950.
Additional Medicare tax. For the last several years an additional 0.9% Medicare (hospital insurance, or HI) tax 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). The tax is in addition to the regular Medicare rate of 1.45% on wages received by employees. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2% on the first $113,700 of wages.
Net investment income tax. This relatively new tax provision can subject all or part of the net investment income, including long-term capital gains and dividends, collected by higher-income individuals to an additional 3.8% “Net investment income tax.” The additional 3.8% Medicare contribution tax will not apply unless your modified adjusted gross income (MAGI) exceeds: $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. Furthermore, the additional 3.8% Medicare contribution tax will only apply to the lesser of your net investment income or the amount of MAGI in excess of the applicable threshold.
If you are within the income levels discussed above you may want to utilize some of the ideas presented earlier in this letter to minimize overall gross income and investment income to potentially reduce or eliminate the additional 3.8% surtax on unearned income.
For a trust, the additional 3.8% net investment income tax will apply to the lesser of: (1) undistributed net investment income or (2) the amount of AGI in excess of the threshold for the top trust federal income tax bracket ($12,300 for 2015). Therefore, many trusts may be exposed to the new tax and it may be beneficial to shift unearned income held in trust to individual beneficiaries if possible.
New Tax Return and Form Due Dates
There will be several new due dates for tax returns and certain information returns effective for the 2017 filing season (tax years beginning after December 31, 2015). The table below lists the updated due dates.
|Form||Due Date For Calendar Year Taxpayers||Due Date For Fiscal Year Taxpayers|
|C-Corporation Income Tax Return (Form 1120)||April 15||15th day of the fourth month following the close of the corporation’s fiscal year|
|S-Corporation Income Tax Return (Form 1120-S)||March 15||15th day of the third month following the close of the corporation’s fiscal year|
|Partnership Income Tax Return (form 1065)||March 15||15th day of the third month following the close of the partnership’s fiscal year|
|Report of Foreign Bank and Financial Accounts (FinCEN Form 114)||April 15||n/a|
|Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts (Form3520)||April 15||n/a|
As 2015 draws to a close, there is still time to make the most of these strategies that can help reduce your tax bill and allow you to recap other potential financial benefits. Please contact us at your earliest convenience to discuss ways in which you can utilize some of the information presented in this letter. We are here to help you develop an individualized tax strategy designed to address your unique financial situation and are glad to set up a planning meeting or assist you in any other way that we can.