2015 Year End Planning

Year end planning will be more challenging than normal this year. Due to the passage of the American Taxpayer Relief Act of 2012 (ATRA) and the provisions of the Patient Protection and Affordable Care Act of 2010 which are scheduled to take effect in 2013 and 2014 individuals will see higher tax rates across the board and a number of popular deductions and credits will be gone. Estate and gift tax rates will be higher as well. Careful tax planning can save you substantial dollars otherwise paid to Uncle Sam. Therefore, tax planning actions taken between now and the end of the year may be more important than ever.

Year-end signals your last chance to balance the timing of income and deductions for tax purposes between the current and the upcoming year to your maximum advantage. By this time of the year, you should have a fairly good picture of where things are headed for you, tax wise. Please be advised that each year more and more taxpayers end up paying Alternative Minimum Tax (AMT). Taxpayers must compute their tax under both the regular and AMT rules and then pay the greater of the two. Being in the world of AMT puts a whole new spin on tax planning because many great planning strategies that make sense in a regular tax situation completely backfire in an AMT scenario. Therefore, please contact us so we can help you review and plan for your particular situation.

If you’ve had a change in circumstances during the year–marriage or divorce, birth of a child, a death in the family, promotion or job loss, inheritance, property loss or other events–year-end tax planning takes on extra importance. In any event, most clients find that sitting down to take inventory of their tax situation at this time, and then taking some relatively simple steps to maximize their tax savings is well worth the effort.

As a result of the Healthcare Act, two new Medicare taxes will kick in starting in 2013. First there will be a new 0.9% Medicare surtax on wages and self-employment earnings exceeding $200,000 ($250,000 if married filing jointly). There will also be a new 3.8% unearned income Medicare contribution tax that may apply to certain taxpayers with Adjusted Gross Income in excess of $200,000 ($250,000 for married filing joint). Starting in 2013, ATRA has also raised the top rate for capital gains and dividends to 20%. In addition the top individual tax bracket is now at 39.6% and with the addition of the surtax on Net Investment Income (NII) this top rate can be as high at 43.4%. As part of the year end tax strategy taxpayers should consider generating short term capital losses to offset potential gains which would yield a much greater tax benefit than in previous years. In addition, year-end tax planning should avoid spikes in income which can push the top rates in to the 39.6% bracket.

In addition, when Congress passed the Affordable Care Act several key provisions were delayed until 2014. Earlier this year the employer mandate part of the plan was further delayed, however, the individual mandate which requires all individuals to carry health insurance coverage or pay a penalty has not been delayed and is scheduled to go into effect on January 1, 2014.

Here is a list of some of the tax opportunities, challenges, and expiring provisions that you may need to consider as part of your year-end tax planning for 2015:

* Several popular but temporary tax incentives are due to expire after 2013. Even though Congress may choose to extend them, at this point it is not clear if they will, so this may be your only opportunity to utilize these tax breaks:
The deduction for state and local sales tax in lieu of the state and local income tax.
The teacher’s $250 classroom expense above the line deduction.
The provision allowing taxpayers to exclude from income cancellation of mortgage debt up to $2 million on qualified principal residence.
The deduction for mortgage insurance premiums as mortgage interest.
The above the line deduction for higher education expenses, which can be as high as $4,000.

* The phase-out rule that reduces write-offs for the most popular itemized deductions items (home mortgage interest, state and local taxes, charitable donations) for high income taxpayers is back in 2013.

* The Child Tax Credit has been made permanent at $1,000 per qualifying child for 2013 and beyond by ATRA legislation. However, since the credit is not indexed for inflation, the future benefit of the credit will continue to decrease.

* Medical expenses used to be deductible if they exceeded 7.5% of adjusted income. For years subsequent to 12/31/12 that threshold has been raised to 10% for any taxpayer who was not 65 years or older before that date. The threshold remains at 7.5% for those taxpayers 65 and older through 2016. Taxpayers should try to aggregate their expenses in one year in order to try and take advantage of the deduction. The threshold however is 10% for all taxpayers for AMT purposes.

* All same-sex marriages are recognized for all federal tax purposes as part of the June 26, 2013 U.S. Supreme Court decision regardless of whether the couple resides in a jurisdiction that recognizes same-sex marriage. All legally married same-sex couples will be treated as married for all federal tax purposes including income, gift and estate taxes.

* The maximum amount available for section 179 expense in the year of purchase remains at a maximum of $25,000 for business use SUV’s and light trucks weighing over 6,000 pounds. There are currently new provisions under consideration by Congress to further close this loophole.

* The section 179 deduction for purchases of depreciable fixed assets remains at $500,000 for 2013 as long as the total cost of the property placed in service does not exceed $2,000,000. For tax years beginning after 2013, however, the maximum deduction is scheduled to drop back to $25,000 indexed for inflation.

* The section 179 expensing allowance for qualified real property is scheduled to expire at the end of 2013, if any qualified real property or leasehold improvements are anticipated, they should be completed by December 31, 2013.

* In addition, first year 50% bonus depreciation is available for new (not used) business property placed in service before December 31, 2013. For a new passenger auto or light truck that is used for business and is subject to the luxury auto depreciation limitation, the 50% bonus depreciation increases the maximum first-year deduction by $8,000. The 50% bonus depreciation will expire at the end of the year unless Congress extends it. The bonus depreciation is over and above any Section 179 deduction that is available.

* Qualifying small employers can claim a Health Insurance tax credit that can potentially cover up to 35% of the cost of providing health insurance coverage to employees. The rules surrounding this particular credit are quite complex and in our experience we have not seen a lot of benefit generated by this credit.

* Revised Repair/Capitalization Rules must be used starting January 1, 2014 in determining whether businesses can deduct their costs as repairs or must capitalize the costs, to be recovered over a period of years. Businesses will benefit if certain procedures for treating expenses are put into place by January 1, 2014. Some businesses will be better off if they start applying the new rules retroactively to the 2012 and 2013 tax years. Many of these decisions require advance planning.

* If you are age 70 ½ or older, are planning on making additional charitable contributions in 2013 and you have not yet received your 2013 required minimum distribution from your IRA, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to IRS approved public charities. The funds must be transferred directly from your IRA to the charity. In addition, these transfers count as part of your required minimum distributions for the year.

* If you turned age 70 ½ in 2013, you can delay your 2013 required distribution to 2014 if you choose, but waiting until 2014 will result in two distribution in 2014. Bunching income into 2014 might put you in to a higher tax bracket or may have a detrimental impact on your other tax deductions in 2014. However, if you plan on being in a lower overall tax bracket in 2014, it may not be a bad idea. If you choose to delay your 2013 distribution until 2014, it will need to be distributed by 4/1/14.

* For 2013, the unified federal gift and estate tax exemption is a relatively generous at $5,250,000. The exclusion is projected to increase to $5,340,000 for 2014. The annual gift tax exclusion has been increased to $14,000 per donee for the 2013 and 2014 years.

* The extended “kiddie tax” under which a child’s income is taxed at a parent’s tax rate has been increased from under age 14 to age 18 and under as well as for older children under age 24 who meet certain criteria. Therefore be careful when transferring securities to children in that age category as they still may be taxed at your rates.

* You may want to consider paying wages to your child in order to shift some of your income into a lower tax bracket. This will also allow the child to have earned income in order to contribute to an IRA account. However, please make sure that wages are reasonable given the child’s age and work skills. Also, if the child is college age, having too much earned income can have a detrimental effect on the student’s need-based financial aid eligibility.

* For 2013 you cannot deduct any cash contributions unless you retain either a cancelled check or other bank record or a written statement from the charity. For cash donations of $250 or more just a bank record is no longer enough. Receipts from the charitable organization showing the amount donated are also required.

* There are also several tax credits that came from the 2008 Energy Act.
The 30% investment tax credit for solar energy property is extended through 2016. This credit may be used to offset the AMT tax.
The credit for residential solar property is extended through 2016 and the credit cap for solar electric investment is removed. This credit may be used to offset the AMT tax.
Consumers could collect a tax credit of $2,500 to $7,500 for the purchase of a plug-in electric car or light truck. The credit is available through 2014. The credit is phased out for each manufacturer after they sell 200,000 vehicles. The credit is available to offset AMT.
The law allowing the deduction of the cost of energy-efficient property installed in commercial buildings is extended through 2013.

We have compiled a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply to everyone, but many clients will benefit from numerous items. 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:

* If you are a participant in an FSA (section 125 plan) increase the amount you set aside for next year in your employer’s health flexible spending account to reduce your taxable base and get tax-free reimbursements for out of pocket medical, dental and qualifying child care costs. Make sure to only set aside what you will need since these type of accounts are “use-it-or-lose-it”. Also, starting in 2011 over the counter drugs (such as aspirin and antacids) no longer qualify for reimbursements. In addition, beginning in 2013, the maximum contribution to a health FSA will be $2,500, but this amount may be further limited by your individual company policy.

*Consider prepaying 2014 educational expenses before the end of 2013 to make them eligible for the American Opportunity Tax Credit before it expires.

* If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to coordinate timing of these sales.

* If you own an interest in a partnership or S corporation and anticipate a loss from operations, you may need to increase your basis in the entity so the loss can be deducted for this year.

* Consider using a credit card to prepay expenses that can generate deductions for this year (i.e. charitable contributions, medical expenses and business expenses, but only if doing so won’t cause an AMT problem).

* You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

* Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.

* Self-employed individuals and businesses should consider setting up a retirement plan. Please note that certain plans must be set up and funded by December 31st of the current year.

* If you are thinking of donating a used auto to a charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities, since the latter may yield a bigger deduction for you.

* If you have appreciated stock that you have held more than a year and you plan to make a significant charitable contribution before the end of the year, keep the cash and donate the stock instead. You’ll avoid paying tax on the appreciation and get to deduct the full value of the stock. However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give cash to the charity.

* Those who are contemplating marriage or divorce need to watch out for how marriage penalties could affect them. Marriage penalty relief has been extended for the 15% tax bracket and the standard deduction but other marriage penalties remain.

* Those receiving Social Security benefits should consider taking a number of steps to reduce or eliminate tax on their benefits by controlling your Adjusted Gross Income.

* Workers may want to ask their employers to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won’t cause an AMT problem).

*Consider maximizing your contributions to an employer sponsored 401K especially if the employer has a matching provision.

* Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2013 miscellaneous itemized deductions subject to the 2%-of-AGI floor (but only if doing so won’t cause an AMT problem).

* If your business maintains a pension plan make sure that you verify with your pension plan administrator any required minimum and maximum pension contribution amounts and the due dates of the contribution.

* If your business has paid off any debt (loans) to you or third parties during the year, make sure that you consider “phantom” taxable income which may result from debt reduction.

* If you will be receiving a year end bonus from your corporation make sure to check the due date of the payroll tax deposit since a larger tax liability can affect the due date of the payroll tax liability payment.

* There are several issues that you need to be aware of if you are a shareholder in an S corporation or a member of an LLC. If you have any of these issues, please contact our office for assistance:
Make sure that you report sufficient amount of wages to the shareholders and officers of S Corporations.
If the shareholders are covered by a health insurance plan, make sure that the cost of the health insurance is properly reflected on Form W-2 for the shareholders and that the payments are either made from the corporate account or are reimbursed to the shareholder by the corporation, otherwise you may lose the tax benefit of the deduction.
If you will be prepaying any year end expenses make sure that your corporate bank balance doesn’t go below zero after the issuance of these checks.
If you will be prepaying any year end expenses by charging them on credit cards, make sure that you have sufficient basis in the corporation, otherwise these expenses may not be deductible. This includes any accruals of pension plan contributions for the year in question which will be paid in the following tax year.

Some “year end” tax strategies can be implemented in a matter of days, but others may take a month or more to properly fit your particular needs. Please contact our office for further advice on how year-end tax planning can help you save tax dollars. During this historic and volatile year, year-end tax planning takes on added importance so you pay “no more than your legal share.”

By doing a formal tax projection, we can address issues like acceleration of income or expenses, purchase of equipment, pension contribution, and other tax saving techniques. With proper tax planning you may be able to reduce your overall income taxes.

As you may already be aware from prior tax projections, the benefits of this planning greatly outweigh the costs. This work is optional, and should you decide to go forward with this projection, you will be billed separately for this work. Fees for this type of analysis usually approximates the fees for the preparation of your income tax return.

If you have any questions about anything mentioned above feel free to contact us through our website @ Losangelescpa.org or Call Us at 424-274-1391.


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Address: Dmitriy Velin, CPA 7315 Sunset Blvd., Suite D West Hollywood, CA 90046

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