2015 Tax Planning Letter – Individuals
Another year is almost over. Here are some things you should know for the 2015 filing season and ideas to save you tax dollars before this year is over.
Extenders
Unfortunately, Congress has failed to pass any significant long-term budget and tax legislation so once again we are down to the wire on what has become known as Extender legislation. There are 55 tax provisions that expired when the Bush Era tax cuts expired December 31, 2010. They were first extended for two years on December 17, 2010 which created what became known as the Fiscal Cliff, December 31, 2012. On January 2, 2013 a new tax act was signed that extended them for 2013. For almost all of 2014 we were left in a state of tax uncertainty as the one-year extension was not signed into law until December 19, 2014 (that’s right, 13 days including weekends and holidays to plan your year). It should be no surprise that although all parties have said they want to extend the taxpayer friendly tax provisions, as I write this, no agreement has been reached.
Here are some of the most important provisions:
*Sales tax deduction
*Exclusion of qualified principal residence indebtedness
*Tuition and fees deduction
*$250 teacher supplies deduction
*Qualified charitable IRA deductions
*Mortgage insurance premium deduction
So stay tuned as a last minute extension would be very good for all of us it will also delay the beginning of the filing of returns as the IRS changes their software and forms.
Form 1095
New this year is Form 1095. This is a form issued by:
*1095-A your insurance exchange
*1095-B your insurance company
*1095-C your employer (if you work for a large company (one with more than 50 full-time employees)
Last year, our organizer asked if you received a Form 1095 and to send it to us if you did. This confused many because last year only the insurance exchanges were required to issue the Form 1095. Insurance companies and large employers were granted a year delay so this will be the first year for these forms.
Why are these forms necessary? Beginning January 1, 2014, all individuals are required to have health insurance for themselves and their dependents unless they meet one of many exemptions. These forms allow the government to verify you had coverage. If you do not maintain insurance there is a penalty called the shared responsibility payment. This penalty for 2015 is the greater of $325 for an adult and up to $975 for a family or 2% of household income in excess of the filing threshold for 2015 (generally $10,300 for individuals and $20,600 for married couples filing jointly).
Avoid underpayment penalties
We are required to pay our taxes ratably over the year. For wage earners (Form W-2) any federal withholding taxes are deemed to be contributed throughout the year regardless of when the actual withholding takes place.
Estimate your income for 2015 and if you are short on your tax withholdings, ask to have more withheld from the paychecks you have left in the year.
For non-wage earners or individuals with pass-through income you are required to make quarterly estimated tax payments. There are two ways to avoid an underpayment penalty. One is to pay 100% (110% for higher income taxpayers) of the prior year tax or 90% of the current year tax. The second option requires you to estimate your income throughout the year and calculate your current year tax. Estimated tax payments are due April 15th, June 15th, September 15th and January 15th. If you think you are short, you can avoid some of the underpayment penalty by increasing your January 15th estimate.
Making gifts to individuals
You can make gifts to any individuals of up to $14,000 per year without having to report them on a gift tax return, Form 709. If you are married you can make a combined gift of up to $28,000. You can also make unlimited payments directly to a medical provided or educational institution on behalf of someone else and it does not count towards their $14,000 annual exclusion. A friendly reminder – gifts to anyone other than a 501(c)3 charity is not tax deductible. The benefit, other than the joy (or necessity) of giving is it reduces your gross estate. For estate tax purposes we all have an exemption for $5,430,000. This amount increases to $5,450,000 in 2016. If you make gifts of more than $14,000 in value you are required to file a Form 709 gift tax return which is due at the time your individual income tax return is due.
Making gifts to charities
Remember the documentation requirements of your gifts to charity. You must maintain bank records such as bank statements, cancelled checks or credit card statements or a written communication from the donee charity as a record of the contribution. Any contributions of $250 or more is required to have a contemporaneous written acknowledgement from the charity. Contemporaneous is at or near the time of the donation but in no way later then the filing of your tax return for the year of the donation. The written acknowledgement must state if the donee charity provided any goods or services (dinner, concert tickets, magazine) in exchange for the donation and if yes, they have to assign a fair market value of the goods or services which are not tax deductible.
Donations of non-cash items must be in good working order or condition and must document the date of the contribution, a list of the items donated, the date originally acquired by you, the cost of the items when you bought them and the fair market value (thrift store value in most cases) at the time of the donation. In most cases the date acquired is various because there are multiple items given at the same time and your best estimate of what you paid for the goods is the best we can hope for. We recommend taking pictures if there is a lot of items you are donating and we recommend using tools like itsdeductible.com to create a receipt for each donation.
Also remember, donations made on your credit card by December 31st are deductible even though the credit card balance is not paid until the subsequent year.
Gains and losses
Be sure to know what your capital gains or losses are for the year and work with your investment advisor to manage these. Net capital gains are taxed at 15% (20% if you are in the highest tax bracket; 0% if you are in the lowest two brackets) and net capital losses are only deductible up to a maximum of $3,000 per year so a large loss might take years to be fully realized from a tax standpoint.
Be careful of mutual fund capital gains. These are gains created inside the mutual fund and since mutual funds don’t pay tax but instead distribute their income to the mutual fund shareholders you can have gains pass through on your year-end 1099. Ask your advisor to estimate this for you.
Increase retirement contributions
Review your contributions and if possible increase your voluntary contributions to your retirement accounts.
2015 elective contribution amounts are as follows:
- 401(k), 403(b) and 457 plans – $18,000
Catch-up 401(k), 403(b) and 457 – $6,000 - SIMPLE IRA plans – $12,500
Catch-up SIMPLE – $3,000 - Keogh plans – $53,000
- IRA – Traditional and Roth – $5,500
Catch-up IRA – $1,000
Accelerate / defer
As always, if your tax bracket is expected to be significantly different in the current year than the next, consider shifting income from the highest tax bracket year. For example, ask your boss if you are getting a bonus for 2015 and if yes, ask if it can be delayed until 2016 if you expect to be in a lower tax bracket next year.
Accelerate deductions to the current year if you expect to be in a higher bracket this year. Consider paying your January 15th state income tax estimate, if any, and pay your January 2016 real estate tax bill in December.
Medical expenses are only deductible if they exceed 10% of your adjusted gross income (7.5% if 65 or older) so bunch as much of your payments as possible into one year in hopes of them qualifying.
New for 2016
Beginning with the 2016 return year, the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) due date return has changed from June 30th to April 15th and now will also be allowed to be extended to October 15, 2017. The FBAR report is used by US Persons to report foreign bank accounts owned or having a signature authority over. You need to report if you have an aggregate value of more than $10,000 at any time during the year in bank accounts, brokerage accounts, mutual funds, trusts, pensions, cash value of life insurance or any other type of foreign account.
If you have any questions about what you have read here or anything else we can help you with please give us a call.
We want to thank our clients so much for your business and the confidence you place in us. We wish you joyous holidays and a terrific New Year.
