2015 Year-End Tax Planning
Tax planning works best when it is practiced year-round, which will reduce the stress at year end that often occurs at this time of the year. 2015 is not presenting any major new tax law changes. Although, as in recent prior years, particularly important at year-end 2015 is the impact of certain tax benefits that expired with 2014 and that may, or may not, be retroactively renewed.
Tax benefits that ended in 2014
Tax benefits that expired on December 31, 2014 include but are not limited to:
The traditional year-end strategy of income shifting applies to year-end 2015. Time your income and deductions so that your taxable income is about even for 2015 and 2016 so your tax bracket does not spike in either 2015 or 2016. If you anticipate a higher tax bracket for 2016, you may want to accelerate income into 2015 and defer deductions into 2016. If you anticipate a leaner 2016, income might be delayed through deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings.
Minimize tax on Social Security benefits
When Social Security recipient’s modified adjusted gross income (MAGI) plus 50% of Social Security benefits exceed certain base amounts, the benefits can be taxable. The MAGI thresholds are $25,000 for singles and $32,000 for marrieds filing jointly. If your income is close to these thresholds you should consider deferring income, if possible, to avoid tax on the benefits.
If you initiated a Roth conversion earlier in 2015 and that Roth account has declined in value since then, you should consider a “Roth reconversion.” Reconverting your Roth IRA back to a traditional IRA before year-end will allow you to avoid paying income tax on an account balance at its higher value.
If you have not yet made a Roth conversion, doing so at year-end 2015 might be an opportunity worth serious consideration. Variables include your present income tax bracket, how close you are to retirement, and your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later.
Alternative Minimum Tax (AMT)
The exemption amount for couples increased to $83,400 and $53,600 for singles and heads of household. The phase-out zones for the exemptions start at $158,900 for couples and $119,200 for singles and household heads.
Capital gains and losses
Time the recognition of capital gains and losses at year-end to minimize your net capital gains tax and maximize deductible capital losses. Many investors still have excess capital losses from past stock market declines that they may now “carry over” to offset capital gains that would otherwise be taxable.
For calendar year 2015, the employee-share of OASDI tax is 6.2 percent up to the Social Security wage base of $118,500 and the Medicare tax is 1.45% with an unlimited wage base.
Also, beginning on January 1, 2013 there is a 0.9% Medicare surtax on earned income. The surtax applies to wages and self-employment income. It applies to single filers and heads of household when total earnings exceed $200,000 and $250,000 for married filing jointly taxpayers. For earnings over the thresh-hold, the effective Medicare tax will be 3.8%, the usual 2.9% tax rate, plus an extra 0.9%. The surtax only applies to the employee’s share of tax, employers do not owe the tax.
Marriage, divorce, the birth of a child, death, a change in job, or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. Your marital status is determined on December 31. If you are married on December 31, you are considered married the entire year. If you were divorced on December 31, you will be considered single for the entire year.
If you have significant income not subject to withholding in 2015 you should increase your payroll withholding for the remainder of the year to ensure that it covers the required estimated payments in order to avoid underpayment penalties
The current estate tax is set at a maximum 40 percent rate and a $5.43 million exemption amount, indexed for inflation. Lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan. The annual gift tax exclusion per donee on which no gift tax is due is $14,000 for 2015 with $28,000 allowed to each donee by married couples. Making a gift at year-end 2015 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.