A First Look At 2015 Year-End Tax Planning
As fall arrives and 2015 winds down, it is a good time to consider what steps you can take to reduce you tax bills for 2015. Developments in 2015 can affect, for example, deductions, the treatment of contributions to tax-favored accounts, and the inclusion of certain benefits in income. Traditional year-end planning techniques for investments are also important. This article reviews some of the 2015 developments in Congress and the IRS to be considered.
Tax Legislation While we wait for Congress to act on the now-expired tax extenders, legislation already passed or likely to be approved before year-end opens some additional year-end tax planning opportunities. The extenders are among the most widely used incentives, but you should not ignore possible tax planning strategies in other bills and new laws.
As January 1, 2016 draws closer, we will have a better indication which pending tax bills will be enacted into law. In the meantime, you should consider how new tax laws and pending proposals may affect your year-end planning.
Tax extenders. While lawmakers debate tax reform, the clock is ticking on the fate of the tax extenders. Last year’s legislation only extended the popular tax breaks for 2014. The expired provisions include the state and local sales tax deduction, higher education tuition deduction, research tax credit, work opportunity tax credit, and others.
The extenders are likely to be renewed for 2015 if not longer. They may be renewed in a package, as in past years, or could be renewed as stand-alone legislation, in an effort to make them permanent. However, the President has vowed to veto the stand-alone bills already passed because they provided no revenue offsets, making the short-term renewal of extenders in a package more likely.
Education. Early in 2015, momentum was building to make college tuition saving plans (529 plans) more taxpayer-friendly, and the House approved HR 529. The bill would allow the purchase of a computer to be considered a qualified expense. Another provision provides tax and penalty relief where a student may have to withdraw from school for illness or other reasons. Under current law, any refunds from the college are subject to immediate taxation and a 10% tax penalty. The bill eliminates this tax and penalty if the refund is redeposited in a 529 account. The Senate has yet to take up the House bill, but reforming 529 plans has enjoyed bipartisan support in the past.
Comprehensive tax reform. It appears enthusiasm for tax reform has waned. Comprehensive tax reform before year-end 2015 is a non-starter and the outlook in 2016, a presidential election year, is murky at best. As a result, traditional year-end planning that balances income, deductions and credits between this year and next is relatively straightforward. However, be alert to several possible wild cards. Although an extenders package is expected to be passed eventually by Congress, it may only cover 2015, with 2016 relief delayed for possible consideration with tax reform.
Investment Planning The wild swings in the stock markets lately have added a degree of volatility not only to investments but also to related tax strategies. Taking inventory of gains and losses at this time to map out a year-end buy, sell or hold strategy later makes particular sense.
Note that immediate losses in the stock markets do not necessarily translate into tax losses. The fact that assets purchased several years ago may still yield taxable gains because of low basis, and the existence of the wash-sale rule if a stock is purchased within 30 days before or after a sale, should be considered in assessing current tax positions.
Also remember the new, higher tax rate environment that is now in its third year. Not only is the top rate now 39.6% for ordinary income (and short-term capital gains) but the rate for long-term capital gains and qualified dividends increased from 15% to 20%. Furthermore, a 3.8% net investment tax applies to taxpayers with income above $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for all others.
Retirement Planning Retirement planning should occur year-round, but focus is usually intensified at year end. Although most IRA contributions for a year may be made until the filing date for that year, other deadlines are at year end, such as contributions to 401(k) plans and Roth conversions and re-conversions.
Required minimum distributions for those over age 70½ also generally carry a year-end distribution date beyond which a penalty applies. One exception allows someone turning age 70½ to delay starting distributions until April 1 of the year following the year in which he or she turns 70½.
One strategy for consolidating IRAs ended this year. Following the case Bobrow v. Commissioner, the IRS announced that, effective for rollover distributions received after 2014, you are now limited to one 60-day rollover per year for all IRA accounts rather than one 60-day rollover per year for each IRA account. Unlimited trustee-to-trustee transfers are still allowed.
ABLE Accounts Families of individuals with disabilities should consider contributions before year-end to A Better Life Experience (ABLE) account. Arkansas has enacted legislation, which along with federal law, allows ABLE accounts to be set up for qualified individuals with disabilities.
Contributions in a total amount up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expenses.
Conclusion Year-end tax planning is important to consider and act upon. Changes in the law can provide opportunities to reduce your tax bill for 2015, by taking appropriate actions by the end of the year. This article has pointed out some of the developments to keep in mind as the end of 2015 approaches.
