Year-end tax planning for 2015 presents challenges to taxpayers that are similar to past tax years. Congress has not enacted the “tax extender” legislation, so a considerable number of tax deductions and credits that expired at the end of last year are once again caught in limbo. Most commentators expect that those deductions and credits will be retroactively reinstated, but no absolute assurance can be offered in that regard.
By way of example, these tax 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. 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.
Other 2015 year-end strategies that should be considered look a lot like the checklists that appeared in our Client Alerts for prior tax years, including:
Deferral of taxable income into future tax years, and acceleration of losses and deductions into this tax year (assumes that taxpayer expects that effective tax rates in 2015 will be greater or equal to the rates that will be applicable in the future tax years.
- Consider converting traditional IRA to Roth IRA.
- Confirm that you have sufficient withholding or estimated tax payment to avoid penalties.
- Take minimum distributions from your IRA or 401(k) plans if you are age 70-1/2 years or older.
- Confirm that you have devoted sufficient hours to any businesses that are throwing off losses so that the Passive Activity Loss rules will not preclude the recognition of such losses in 2015, and prove up those hours by contemporaneous documentation.
- Make your 2015 HSA contribution prior to year-end, if it is beneficial.
- Businesses should consider accelerating expenditures for business expensing options under IRC §179 for assets placed in service, at least to the level permissible without giving effect to any tax extender legislation that may be retroactively enacted.
- Businesses may be able to set up a qualified retirement plan before year end which may yield a 2015 deduction even though funded next year.
- Charitable deductions (including those that yield a credit for state income tax purposes in addition to the federal income tax deduction) should be considered.
- If you are a high net worth taxpayer, consider making gifts to reduce your taxable estates for estate tax purposes, utilizing the $14,000 per donor per donee annual exclusion, and, perhaps some or all of your lifetime exclusion.
In mid-year 2015, the IRS announced that regulations would be forthcoming addressing certain gift tax issues relating to interfamily gifts. Much speculation abounds regarding the scope and extent of such new regulations. Some practitioners are suggesting that the new regulations might be given immediate effect (as opposed to the more typical protocol of specifying a future effective date when the regulations would become final). Accordingly, some advisors are recommending that clients that otherwise have fixed intentions of making substantial gifts to their family members might want to effectuate those transfers immediately in order to avoid any adverse impact of the new regulations.
The adoption of any of these 2015 year-end strategies requires careful coordination based upon the taxpayer’s individual (or entity) circumstances. Consultation with your tax advisors is highly recommended.