First Look at Year-End Tax Planning
The approach of year-end 2015 makes it tax planning season. Tax law developments in 2015 can affect, for example, the deduction of costs and expenses, the treatment of contributions to tax-favored accounts, and the inclusion of certain benefits in income. Traditional year-end planning techniques for investments and retirement are also important. Small businesses also have some tools for year-end tax planning. Although it may seem early to contemplate year-end planning, the remaining weeks of 2015 will pass quickly and taxpayers need to be proactive.
Taking inventory of gains and losses at this time to map out a year-end buy, sell or hold strategy later makes particular sense. Investors should 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.
Taxpayers should also remember the higher tax rate environment that is now in its third year. Not only has the top rate jumped to 39.6 percent for ordinary income (and short-term capital gains) but the rate for long-term capital gains and qualified dividends has increased from 15 to 20 percent. Furthermore, a 3.8 percent net investment tax applies to taxpayers with income above a non-inflation-adjusted threshold ($250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for all other taxpayers).
Saving for retirement
Although most IRA contributions for a particular 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 retirees and those over age 70 ½ also generally carry a year-end distribution date beyond which a penalty applies. One exception allows an individual turning age 70 ½ to delay starting distributions until April 1 of the year following the year in which the individual turns 70 ½.
Many small businesses have relied on the generous Section 179 deduction, which is now up for renewal as part of the extenders legislation, to gain an immediate write-off for equipment, rather than follow depreciation schedules. One alternative now available to many businesses is the de minimis safe harbor threshold amount under the final so-called "repair regs." Currently, a de minimis safe harbor under the repair regulations allows taxpayers to deduct certain items that cost $5,000 or less (per item or invoice) and that are deductible in accordance with the company's accounting policy reflected on their applicable financial statement (AFS). IRS regulations also provide a $500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
New tax laws
So far this year, Congress has passed and President Obama has signed several tax bills. Two new laws impact tax planning for public safety officers. The Don't Tax Our Fallen Public Safety Heroes Act clarifies that both federal and state benefits for public safety officers fallen or injured in the line of duty are treated the same in the tax code and are not taxable. The Defending Public Safety Employees' Retirement Act affects retirement planning. Generally, taxpayers who receive an early distribution from a qualified retirement plan are subject to a 10 percent penalty, unless an exemption exists. The Defending Public Safety Employees' Retirement Act expands the exemption to include certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers.
Late last year, Congress passed the legislation creating A Better Life Experience (ABLE) accounts. States are now enacting enabling legislations, which along with federal law, will allow ABLE accounts to be set up for qualified individuals with disabilities (who became disabled before age 26) for tax years beginning after December 31, 2014. 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 expense.
One bill that has not yet passed is legislation to extend the so-called tax extenders. The Tax Increase Prevention Act of 2014 (TIPA) only extended these popular but temporary tax breaks for 2014. The expired extenders include the state and local sales tax deduction, higher education tuition deduction, transit benefits parity, research tax credit, the work opportunity tax credit, and many others. The extenders are likely to be renewed for 2015 but Congress may wait till December to pass a bill. Our office will keep you posted on developments.