Year-End Tax-Planning for Businesses & Business Owners for 2015

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

  • Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’ worth of depreciation deductions in 2015
  • Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.
  • A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.
  • To reduce 2015 taxable income, if you are a debtor, consider deferring a debt-cancellation event until 2016.
  • To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don’t miss out on any resuscitated tax-saving opportunities.

Year-End Tax Planning For Individuals For 2015

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

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 MAGI.

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 over withheld. 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.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Year-End Tax Planning Moves for Individuals

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be For example, you can sell the original holding, 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.
  • Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • 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.
  • It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.
  • Consider using a credit card to pay deductible expenses before the end of the Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
  • 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 the 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 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.
  • 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 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.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016-the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don’t miss out on any resuscitated tax-saving opportunities.

Year-end Planning: Reducing Exposure to the 3.8% Surtax on Unearned Income

General background – Certain unearned income of individuals, trusts, and estates is subject to a surtax (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), for individuals is 3.8% of the lesser of:

  • net investment income (NII), or
  • 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).

MAGI is adjusted gross income (AGI) plus any amount excluded as foreign earned income (net of the deductions and exclusions disallowed with respect to the foreign earned income).

For an estate or trust, the surtax is 3.8% of the lesser of (1) undistributed NII or (2) the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

For 3.8% surtax purposes, NII is investment income (see below) less deductions properly allocable to such income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in NII.

Investment income is:

  • gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn’t apply,
  • other gross income derived from a trade or business to which the 8% surtax contribution tax does apply, and
  • net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t

The 3.8% surtax applies to a trade or business only if it is a Code Sec. 469 passive activity of the taxpayer or a trade or business of trading in Code Sec. 475(e)(2) financial instruments or commodities. Investment income doesn’t include amounts subject to self-employment tax, distributions from tax-favored retirement plans (e.g., qualified employer plans and IRAs), or tax-exempt income (e.g. earned on state or local obligations).

The surtax doesn’t apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation (but income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax).

Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as NII only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

Overview of year-end strategies – 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 unearned income, and others will need to consider ways to minimize both NII and other types of MAGI.

  • Illustration 1 – For 2015, Joan, a single taxpayer, estimates she will have MAGI of $200,000, consisting of $180,000 of salary and non-investment earnings and $20,000 of NII. Since Joan’s MAGI is not above the level that would subject her to the 8% surtax, her year-end strategy for the surtax will be to avoid-if feasible, from the investment and practical viewpoint-realizing any additional income before the end of the year that will cause her to be subject to the surtax.
  • Illustration 2 – Assume the same facts as in the first illustration, except that Joan’s MAGI will include

$200,000 of salary and non-investment earnings plus $20,000 of NII. Since all of her NII of $20,000 is now subject to the surtax, she should try to avoid, to the extent possible, having any additional NII for the balance of the year since any additional NII will also be subject to the surtax.

  • Observation – Since, in illustration (2), all of Joan’s NII of $20,000 will be subject to the surtax, an increase in income other than NII will have no effect on the amount of her NII that is subject to the
  • Illustration 3 – In January of 2015, Jack, a single, self-employed taxpayer, sold investment land for a

$100,000 gain and does not anticipate selling any other investments during the balance of this year. He won’t have other NII. He estimates that he will have $100,000 of self-employment earnings and other non-investment-income for the year. Thus, Jack will be exactly at the $200,000 threshold for single taxpayers. He should, to the extent feasible and practical, defer additional amounts of earned income over $100,000 to 2016, as every additional dollar of earnings over that sum will expose a dollar of his $100,000 NII to the 3.8% surtax. For example, if he gets extra business toward the end of the year, Jack should consider deferring some of his billings until after year-end.

Re-examine passive investment holdings – The 3.8% surtax applies to income from a passive investment activity, but not from income generated by an activity in which the taxpayer is a material participant. One subject a “passive” investor should explore with a tax adviser knowledgeable in the passive activity loss (PAL) area is whether it would be possible (and worthwhile) to increase participation in the activity before year-end so as to qualify as a material participant in the activity.

In general, a taxpayer establishes material participation by satisfying any one of seven tests, including: participation in the activity for more than 500 hours during the tax year; and participation in the activity for more than 100 hours during the tax year, where the individual’s participation in the activity for the tax year isn’t less than the participation in the activity of any other individual (including individuals who aren’t owners of interests in the activity) for the year. Special rules apply to real estate professionals.

  • Caution – Becoming a material participant in an income-generating passive activity wouldn’t make sense if the taxpayer also owns another passive investment that generates losses that currently offset income from the profitable passive

Taxpayers that own interests in a number of passive activities also should re-examine the way they group their activities. A taxpayer may treat one or more trade or business activities or rental activities as a single activity (i.e., group them together) if based on all the relevant facts and circumstances the activities are an appropriate economic unit for measuring gain or loss for PAL purposes. A number of special “grouping” rules apply. For example, a rental activity can’t be grouped with a trade or business activity unless the activities being grouped together are an appropriate economic unit and a number of additional tests are met. And real property rentals and personal property rentals (other than personal property rentals provided in connection with the real property, or vice versa) can’t be grouped together.

Once the taxpayer has grouped activities, he can’t regroup them in later years, unless a one-time-only “fresh-start” regrouping is allowed. But if a material change occurs that makes the original grouping clearly inappropriate, he must regroup the activities.

Use the installment method to spread out taxable gain on a sale. The entire profit from a sale ordinarily is taxable in the year of sale. But by making a sale this year with part or all of the proceeds payable next year or later, a non-dealer seller becomes taxable in any year on only that proportion of his profit which the payments he receives that year bear to the total sale price. The installment method can be a useful way to spread out gain and thereby avoid or minimize a taxpayer’s exposure to the 3.8% surtax.

Another advantage of installment reporting is that it can give the seller an important degree of hindsight in deciding whether to throw profit into 2015 or 2016. An individual who makes a qualifying sale in 2015 has until the due date of his 2016 return (including extensions) to decide whether to elect out of installment reporting and report his entire profit in 2015 or to defer that part of the gain attributable to payments to be received in later years. A problem here is that regardless of how the seller elects, the buyer will still be paying for the property in installments. If the installment method isn’t used, the seller will be paying taxes in the year of sale on income that won’t be received until a later year or years.

Use a like-kind exchange to defer gain recognition to a low-NII year. Under the like-kind exchange rules, if specific identification and replacement period requirements set forth in Code Sec. 1031 are met, gain or loss is not currently recognized on the exchange of property held for productive use in a trade or business or for investment for property of like-kind that will be held for productive use in a trade or business or for investment. Qualified intermediaries (QIs) and multiparty deferred exchanges may be used to structure like-kind exchanges, allowing greater flexibility in qualifying for income deferral.

A like-kind exchange may be appropriate for a taxpayer who wants to realize a gain on investment property this year, but defer gain recognition until a later year when his MAGI isn’t likely to exceed the applicable threshold. The taxpayer realizes the gain on the relinquished property this year, and recognizes the gain in a later year when he sells the like-kind property he receives in exchange for the relinquished property.

Adjust the timing of a home sale. When a taxpayer sells a home he has owned and used as a principal residence for at least two of the five years before the sale, he may exclude up to $250,000 in capital gain if single, and

$500,000 in capital gain if married. Gain on a sale in excess of the excluded amount will increase NII and net capital gain. And if taxpayers sell a second home (vacation home, rental property, etc.) at a profit, they pay taxes on the entire capital gain and all of it will be NII potentially subject to the 3.8% surtax.

It should be noted that the non-excluded portion of a home sale gain also increases a taxpayer’s MAGI. Thus, the taxable portion of a home sale may cause a taxpayer to exceed the threshold amount, subject part or all of the taxable home sale gain to the 3.8% surtax, and expose other NII to the 3.8% surtax.

  • Recommendation – A taxpayer who expects to realize a gain on a principal residence substantially in excess of the applicable threshold, and is planning to sell either this year or the next, should try to fine-tune the timing of the sale so as to minimize the gain’s exposure to the 3.8% surtax, and reduce his overall tax
  • Illustration 4 – A married couple will earn a combined salary of $290,000 for 2015. They plan to retire and move to a sunnier climate next Their combined earnings for 2016 won’t exceed $150,000. They plan to sell their principal residence for $1.2 million, and should net a gain of about $700,000, of which $500,000 will be excluded.

If they sell this year, they’ll have more than $464,850 of taxable income and will wind up in the top tax bracket (39.6%). Additionally, they will pay a $7,600 surtax (3.8%) and at least part of their $200,000 capital gain will be subject to a 20% tax. If they can wait until next year to sell at around the same price, and have no other gains or losses or other investment income, then only $100,000 of their home-sale gain will face the 3.8% surtax. The surtax equals $3,800, namely 3.8% of the lesser of (a) $200,000 NII; or (b) $100,000 (excess of $200,000 NII +

$150,000 of other gross income over the $250,000 threshold for marrieds filing jointly). Additionally, all of their capital gain on the home sale likely will be subject to a 15% tax.

Recognize losses to offset earlier gains – As year-end approaches, one way to reduce NII is to recognize paper losses on stocks and use them to offset other gains taken earlier this year. What if the taxpayer owns stock showing a paper loss that nonetheless is an attractive investment worth holding onto for the long term? There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called “wash sale” rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). However, a taxpayer can substantially preserve an investment position while realizing a tax loss by using one of several techniques, such as buying more of the same stocks or bonds, then sell the original holding at least 31 days later, or selling the original holding and then buying the same securities at least 31 days later.

Use Roth IRAs instead of traditional IRAs – The 3.8% surtax makes Roth IRAs look like a more attractive alternative for higher-income individuals. Qualified distributions from Roth IRAs are tax-free and thus won’t be included in MAGI or in NII. By contrast, distributions from regular IRAs (except to the extent of after-tax contributions) will be included in MAGI, although they will be excluded from NII.

In general, a qualified distribution from a Roth IRA is one made: (a) after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for the taxpayer’s benefit); and (b) on or after he attains age 591/2; because of death or disability; or to buy, build, or rebuild the taxpayer’s first principal residence. As a bonus, Roth IRA owners do not have to take required minimum distributions (RMDs) during their lifetimes (Roth beneficiaries must, however, take required distributions from the account).

  • Recommendation – Higher-income employees should use designated Roth accounts if their retirement plans offer this option. A designated Roth is a separate account in a Code Sec. 401(k) , Code Sec. 403(b) , or Code Sec. 457 plan to which an employer allocates an employee’s designated Roth contributions and their gains and Instead of making elective, pre-tax contributions to his regular account, the employee directs that part or all of the contribution be made to a nondeductible designated Roth account within the plan. When a designated Roth account is set up within a Code Sec. 401(k) plan, it’s called a Roth 401(k). Note that unlike regular Roths, where contributions can’t be made by higher-income individuals, there is no income limitation on annual contributions to a designated Roth. Workers of all income levels are eligible to contribute to such retirement accounts.

Time conversions to a Roth IRA – Taxpayers who are thinking of converting regular IRAs to Roth IRAs this year should do so with care, as the move will increase MAGI, and therefore potentially expose – or expose more of – their NII to the 3.8% surtax. Some suggestions:

  • If possible, time conversions so as to keep MAGI below the applicable threshold
  • If the MAGI dollar threshold will be exceeded in any event, delay the conversion until next year if there is substantial NII this year but there will be low or no NII next Or do the reverse – accelerate a conversion into this year if there is low or no NII in 2015 but there is likely to be substantial NII in 2016.

Timing considerations for required minimum distributions – For the 3.8% surtax purposes, investment income doesn’t include distributions from tax-favored retirement plans, such as qualified employer plans and IRAs. But MAGI does include taxable distributions from qualified employer plans and IRAs, including required minimum distributions (RMDs) from qualified plans and IRAs.

Taxpayers nearing their MAGI threshold, or who already exceed it because of other income, may have an opportunity to plan RMDs to avoid exposing their NII to the 3.8% surtax. For example, taxpayers who attain age 701/2 in 2015 may delay taking their first RMD (i.e., for 2015) until their required beginning date of Apr. 1, 2016. This would be advisable where taking the first distribution in 2015 will cause the distributee’s MAGI to exceed the threshold amount that triggers the 3.8% surtax on NII, but deferring the distribution until next year will not have the same effect because the distributee’s income from other sources will be much lower. However, when deciding if deferring the first RMD makes sense, note that doing so does not absolve the taxpayer from making an RMD for the second distribution year (i.e., for 2016).

Overview Of Tax-Saving Moves For The Rest Of 2015

Year-end tax planning for 2015 must take account of the many important “temporary” tax provisions that have expired and may not be retroactively reinstated and extended before year-end (if they are extended at all). They include: the election to claim sales and use taxes as an itemized deduction instead of state income taxes; charitable distributions from IRAs for those age 70-1/2 and older; bonus first-year depreciation deductions for qualifying new purchases; and generous expensing limits. The key expired provisions are covered in this Tax Planning & Practice Guide, along with year-end planning moves to cope with the uncertainty they cause.

Effective year-end tax planning also must take into account each taxpayer’s particular situation and planning goals, with the aim of minimizing taxes. For example, higher income individuals must consider the effect of the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds (which are lower than the thresholds at which the phase-out of itemized deductions and personal exemptions begins).

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, should consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business’s billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2015 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.

Inflation adjustments to rate brackets, exemption amounts, etc. – For both 2015 and 2016, some individuals will benefit from inflation adjustments in the thresholds for applying the income tax rates, higher standard deduction amounts, and higher personal exemption amounts.

Capital gains – 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.

Low-taxed dividend income Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income. However, the 3.8% surtax on net investment income may apply.

Traditional IRA and Roth IRA year-end moves – One can convert traditional IRAs to Roth IRAs. And, one can then recharacterize such a conversion and can even, possibly, reconvert the recharacterized transaction.

Expensing deduction – Unless Congress changes the rules, for qualified property placed in service in tax years beginning in 2015, the maximum amount that may be expensed is $25,000, and the beginning-of-phaseout amount is $200,000. In earlier years, the dollar limit was $500,000 and the beginning-of-phaseout amount was $2 million. However, despite what Congress does (or doesn’t do), some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a “de minimis” safe harbor election in the capitalization regs.

First-year depreciation deduction – Unless Congress extends Code Sec. 168(k), property bought and placed in service in 2015 (other than certain specialized property) no longer qualifies for the 50% bonus first-year depreciation deduction. However, because of the half-year convention that generally applies in the computation of cost recovery deductions for property (other than real property) first placed in service during the current tax year, year-end purchases of depreciable property can achieve tax savings even if bonus depreciation is not extended. Under the half-year convention, a business asset placed in service at any time during the tax year-even in the final days-is generally treated as having been placed in service in the middle of that year.

Deduction for qualified production activities income – Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer’s “qualified production activities income” for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or (2) the taxpayer’s taxable income for that tax year. This deduction generally has the effect of a reduction in the taxpayer’s marginal rate and, thus, should be taken into account when making decisions regarding income shifting strategies.

Changes in individual’s tax status may call for acceleration of income – Changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered.

Alternative minimum tax (AMT) – Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not save taxes if the taxpayer is subject to the AMT.

Time value of money – Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Estimated tax – For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another.

Obstacles to deferring taxable income – The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain taxpayers use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions – The timing of charitable contributions can have an important impact on year-end tax planning. Note that in earlier years (but not 2015, unless Congress extends this tax break), individual taxpayers who are at least 70-1/2 years old could contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduced their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. As explained, some taxpayers who would take advantage of this tax break for this year, if it were extended, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2015.

Net operating losses and debt cancellation income – A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. Also, a debtor who anticipates having the debt cancelled or debt reduced should consider steps to defer the resulting taxable income until 2016.