Year-end tax planning this year will be just as complicated as it was last year because of uncertainty surrounding many expired tax breaks for individuals and businesses. Tax legislation signed into law last December extended several expired breaks, but only through the end of 2014.
While Congress mulls legislation to extend (or even make permanent) some expired tax provisions, it’s difficult to predict what will be included in the final bill. Fortunately, although there are some year-end tax planning strategies that can’t be implemented until after tax legislation is signed into law, there are still many that can be implemented now.
Take advantage of planning strategies for individuals
Individuals often can reduce their tax bills by deferring income to the next year and accelerating deductible expenses into the current year. To defer income, for example, you might ask your employer to pay your year-end bonus in early 2016 rather than in 2015.
And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2015 contributions to IRAs, and certain other retirement plans, after the end of the year.
Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2015 return even if you don’t pay your bill until next year.
Other year-end tax planning strategies to consider include:
Offsetting capital gains. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some poorly performing investments at a loss.
Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married couples filing jointly). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.
In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the applicable NIIT threshold by deferring income or accelerating certain deductions.
Maximize your retirement savings. The limit on employee contributions to 401(k) plans is $18,000. Additionally, if you are over 50, your catch-up contribution is $6,000. Contributing to your employer retirement account is a great way to save on taxes, assuming you use pre-tax dollars.
Charitable giving. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains.
Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.
Don’t forget about non-cash contributions. Frequently we clean out our closets and discard items without obtaining a charitable deduction, or we take a shortcut and tell our tax preparer to use the maximum amount that will not raise an IRS red flag. If the non-cash donations are less than $500, simply report the amount on your tax return. If the amount is over $500, Form 8283 should be completed, which tells the IRS the name and address of the charity and the fair market value and listing of what you gave away.
When donating clothing and household items, don’t stuff everything into garbage bags without listing everything you put in them. This approach will not stand up to IRS scrutiny if you’re selected for audit. Taxpayers need to keep an itemized list of the items donated. Both the Salvation Army and Goodwill publish valuation guides for donated items that can be downloaded from their websites. There are also mobile apps that allows you to input information about the charity, list your donated items, and let the program value them for you. The IRS generally accepts the values assigned by these guides.
Keep it in the family. If you are self-employed, consider hiring your children. Family tax savings are available when your child works part time or full time for your business. Their wages are not subject to the kiddie tax and they can earn up to the standard deduction ($6,300 for 2015) before owing federal income tax. Wages paid to children under 18 aren’t subject to FICA/FUTA taxes. The children can also fund a retirement account. During 2015, your child can deposit up to $5,500 into a Roth IRA. The funds do not have to come from the child’s wages, but the contribution cannot be more than your child’s earned income.
Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, and the above-the-line deduction for qualified tuition and related expenses.
Prepare for possible revival of expired business breaks
Year-end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired on December 31, 2014:
Enhanced Section 179 expensing election. Before 2015, Sec. 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, on a dollar-for-dollar basis, to the extent qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election beyond 2014, these limits have dropped to only $25,000 and $200,000, respectively.
50% bonus depreciation. Also expiring at the end of 2014, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it’s unavailable for 2015 (with limited exceptions).
Lawmakers may restore enhanced expensing and bonus depreciation retroactively to the beginning of 2015, but they probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?
- If you need equipment or other assets to run your business, acquire it regardless of the availability of tax breaks.
- For less urgent asset needs, consider spending up to $25,000 — the amount you’ll be able to expense regardless of whether Congress extends the expired breaks.
- For additional planned asset purchases, consider taking a wait-and-see approach and be prepared to act quickly if and when “tax extenders” legislation is signed into law.
Keep in mind that, to take advantage of depreciation tax breaks on your 2015 tax return, you’ll need to place assets in service by the end of the year. Paying for them this year isn’t enough.
Other expired tax provisions to keep an eye on include the research credit, the Work Opportunity credit, Empowerment Zone incentives and a variety of energy-related tax breaks.
Follow traditional year-end strategies for businesses
As always, consider traditional year-end planning strategies, such as deferring income to 2016 and accelerating deductible expenses into 2015. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year or accelerate deductions by paying certain expenses in advance.
If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year-end bonuses accrued in 2015 even if they aren’t paid until 2016 (provided they’re paid within 2½ months after the end of the tax year). Please note that bonus accruals made to owners are potentially not deductible depending on the level of ownership in the business.
But deferring income and accelerating deductions isn’t the best strategy in all circumstances. If you expect your business’s marginal tax rate to be higher next year, you may be better off accelerating income into 2015 and deferring deductions to 2016. This strategy will increase your 2015 tax bill, but it can reduce your overall tax liability for the two-year period.
Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible and doing so will lower your tax bill.
Be mindful of the ACA’s information reporting deadlines
Something else to think about on the tax front as we approach year end is the upcoming deadline for the Affordable Care Act’s information reporting provisions for applicable large employers (ALEs). ALEs — generally those with at least 50 full-time employees or the equivalent — must report to the IRS information about what healthcare coverage, if any, they offered to full-time employees.
The reporting deadline is February 28 (March 31, if filed electronically) of the year following the calendar year to which the reporting relates. Smaller employers that are self-insured or part of a “controlled group” ALE will also have reporting obligations.
With the deadline approaching, now is the time for affected employers to begin assembling the necessary information. The compliance obligation will likely require a joint effort by the payroll, HR and benefits departments to collect the relevant data.
The IRS has developed new forms for this type of information reporting: Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” (A non-ALE self-insured employer should file Forms 1094-B and 1095-B.)
Don’t let uncertainty paralyze your planning efforts
Uncertainty over expired tax breaks has been an issue with year-end tax planning for the past few years. Nevertheless, most steps to reduce your 2015 tax bill must be taken before year end. We can guide you through the uncertainty by helping you to implement the strategies available today and to be in a position to act quickly when tax legislation is signed into law. Contact your CSH advisor to see what advantages could apply to your situation.