The end of 2015 is nearly in sight, which means the time for year-end tax planning is here as well. Effective year-end tax planning could enable you to reduce your tax liability this year and possibly next year as well.
Feelings of uncertainty are looming around markets and the general economy. Congress seemed unable to reach any consensus thus far in 2015 around several significant tax breaks that expired at the end of last year. As some of these tax breaks could ultimately be extended retroactively or passed just before the year’s end, it is only that much more important to consider your options and plan. It is important to note that many of these same tax breaks were made retroactive for 2014.
Some of the tax breaks that could still be in play for individuals should Congress act include being able to deduct state and local sales taxes as well as use taxes instead of state and local income taxes. Additionally, there was an above-the-line-deduction for qualified expenses related to pursuing higher education; tax-free IRA distributions for charitable purposes by individuals 70.5 years old or older; and an exclusion for up to $2 million of mortgage debt forgiveness on a principal residence.
Meanwhile, businesses might still see expired tax breaks retroactively reinstated around the first-year bonus depreciation of 50 percent for the majority of new machinery, equipment and software. Additionally, there is the $500,000 annual expensing limitation; a research tax credit; and a 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
High income earners are faced with several distinct reasons for concern when it comes to year-end tax planning. These taxpayers should be cautious of the 3.8 percent surtax on specific unearned income and the additional 0.9 percent Medicare or hospital insurance (HI) tax. The HI tax applies to those whose wages received from employment and self-employment exceeds an unindexed threshold amount. That amount is $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 for any others.
The 3.8 percent surtax is of either net investment income (NII) or the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount – based on whichever is less. The threshold amounts are $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separate returns, and $200,000 for any others. In order to minimize or eliminate this surtax, taxpayers might be able to defer any additional NII for the rest of 2015. Meanwhile, a more effective strategy for some taxpayers might be to shrink MAGI outside of NII, while still others would be best advised to minimize both NII as well as other forms of MAGI.
Year-end tax planning is also advised for some taxpayers to address the 0.9 percent Medicare tax. Employers are required to withhold the additional Medicare tax associated with wages above the $200,000 mark irrespective of filing status or other income. Self-employed taxpayers need to consider this threshold when calculating estimated tax. For some, scenarios could exist where an employee must have more withheld toward the year’s end to cover the tax. For illustrative purposes, consider a taxpayer who earns $200,000 during the first half of the year from a single employer who then earns a similar amount from another during the rest of the year; this individual would owe the additional Medicare tax and yet neither employer would have done a withholding as the amount didn’t surpass the $200,000 for either.
While the year-end tax planning strategy is different for every individual, family and business, several tactics are widely applicable. In two subsequent articles, a sampling of such tactics will be offered for individuals first and subsequently for businesses.
In the meantime, we encourage you to contact the Daszkal Bolton tax professional with whom you work to begin your year-end tax planning before the Halloween horrors extend well beyond October.
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