2015 Year-End Tax Planning for Individuals – 12 Keys to Tax Minimization

John (Rusty) Davis, CPA

Manage Investment Portfolio Gains and Losses

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, and then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

Capital gains and losses present excellent opportunities for deferral because you have nearly complete control over when you sell them, but be careful when harvesting losses. You generally cannot use capital losses against other kinds of income, and if you buy the same security within 30 days before or after you sell it, you cannot use the loss under the wash sale rules.

Long-term capital gains are taxed at a rate of (a) 20% if they would be taxed at a rate of 39.6% if they were treated as ordinary income, (b) 15% if they would be taxed at above 15% but below 39.6% if they were treated as ordinary income, and (c) 0% if they would be taxed at a rate of 10% or 15% if they were treated as ordinary income. And, the 3.8% surtax on net investment income may apply

Step up level of participation in business activity to meet material participation standard under passive loss rules

Dispose of passive activity to free up suspended losses

Accelerate Deductions and Defer Income

Why pay tax now when you could pay later? The time value of money can make deferring tax almost as valuable as escaping it. Generally, you want to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

Get Your Charitable House in Order

If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented in order to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

Bunch Itemized Deductions

Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

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.

Always Consider Alternative Minimum Tax

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.

Make Up a Tax Shortfall with Increased Withholding

Don’t forget that certain kinds of taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses.

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 if you won’t be subject to alternative minimum tax (AMT) in 2015.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.

Take a Closer Look at Your State Residency Status

For individuals who split their time in two different states throughout the year, now is an excellent time to consider where you may be taxed as a resident for 2015. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if you reside in a state for 183 days or more, that state will assert residency and the ability to tax all of your income. Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, and bank accounts) you could run the risk of being taxed as a resident in the old state.

Evaluate the Net Investment Income Tax and Medicare Surtax

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 his 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 other individuals will need to consider ways to minimize both NII and other types of MAG

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.

Consider Change in File and Suspend Method of Claiming Social Security

The Bipartisan Budget Act of 2015, signed by President Obama on 11/2/15, eliminates the file and suspend method, a popular strategy used by married couples to maximize their lifetime Social Security benefits. Under this approach, a higher earning spouse claims benefits at his full retirement age (currently age 66) but suspends the benefits until a later date (e.g., at age 70 or sooner, if desired), allowing the Social Security credits to continue to grow. The lower earning spouse claims benefits based on the higher earning spouse’s earning record, which are more than the benefits based on his or her own earnings record. In a provision labeled “closure of unintended loopholes,” the Act effectively eliminates this opportunity for claims filed after 4/30/16 (180 days after enactment). Those who’ve been using this method, or other eligible individuals who file to claim benefits under this method within the next 180 days should not be affected.

Review All Options for Retirement Savings

Set up a self-employed retirement plan – SEP, SIMPLE, OR 401K, prior to 12/31/15 to evaluate options for tax-deductible contributions for the year.

If you believe a Roth IRA is better than a traditional IRA, 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—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

Learn About The New Treasury Launch of “myRAs”

With the initial pilot phase of the program concluded, the Treasury has announced that myRAs (my Retirement Accounts) are now available nationwide. A myRA is a Roth IRA with Roth IRA annual contribution limits ($5,500 for 2015, $6,500 if age 50 by 12/31/15) and income eligibility limits [i.e., available to those with annual taxable income of less than $131,000 (individuals) or $193,000 (couples) in 2015. Key features include the ability to open an account and contribute small amounts through payroll direct deposits, bank drafts, or tax refund direct deposits; no fees; balances backed by the U.S. Treasury; and account portability.

Review Estate Documents and Consider Gifting

Make gifts taking advantage of the $14,000 gift tax exclusion

Update your list of personal assets and liabilities, including naming on deeds, titles, accounts.

Review and update key estate documents: Wills, Trusts, Beneficiaries, Power of Attorney, Health Care Power of Attorney, Advanced Directive, and any Business Agreements.

Evaluate Federal and State estate exemption amounts as part of a legal review of overall estate plan.