UPDATE: The basic principles of this article can be applied to any tax year. Make sure you check for any changing tax laws and consult a tax professional.
It’s time to address planning opportunities aimed towards reducing your 2015/2016 income tax liability. We recommend that all of our clients invest a few hours before year-end to project their 2015 taxable income and reflect on the tax planning ideas listed below. Acting on these planning opportunities before year-end may save you thousands of dollars. This is also a good time to start organizing your tax records so that we can begin the preparation of your 2015 income tax returns early in 2016.
The general rules of tax planning are as follows:
Defer income to the next year and accelerate deductions into the current year;
- However, if you expect to be in a higher tax bracket next year, or expect to be subject to the alternative minimum tax (AMT) this year and not next year, you may want to defer deduction and accelerate income (AMT will generally apply if you have significant capital gains and/or a large amount of taxes and miscellaneous itemized deductions -employee business expenses, investment expenses, legal fees, etc.);
- The other goal of planning is to ensure maximum benefit of deductions that have limits based on income through a technique called bunching.
It is generally helpful to use your 2014 income tax return to project your taxable income for 2015 by adjusting the 2014 items for expected changes in 2015. The following are some specific example of how to implement this planning:
- businesses generally have some leeway in the timing of billings/collections and the payment of expenses between 2015 and 2016; accordingly, there is some flexibility in managing 2015 business income;
- business owners can time year-end purchases of office equipment and other business property to take full advantage of the section 179 and bonus depreciation write-offs (the limit will be only $25,000 unless extended, see below for details);
- if you are an employee due a year-end bonus, consider asking your employer to pay the bonus in January 2016;
- harvest gains or losses from your investment portfolio;
- if you own a traditional IRA or a SEP IRA, consider converting it into a Roth IRA and recognizing the conversion income this year;
- if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable;
- retirement plan contributions can be maximized or distributions of income can be taken when applicable;
- secure a loss deduction for a nearly worthless security (not otherwise deductible unless you can prove that it is completely worthless, by selling it (even if only for a very nominal amount);
- accelerate or postpone year-end:
- charitable contributions (you may consider a donor advised fund, available from a number of mutual fund companies, if you would like to control the investment of the funds and have them distributed to the charity of your choice at a later date);
- state income tax installments and/or balances;
- property tax payments; and
- medical and dental expense payments.
- since medical expenses are deductible only to the extent that they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into either 2015 or 2016 may help overcome this threshold;
- likewise, miscellaneous itemized deductions, such as employee business expenses, investment advisor fees and certain legal fees are deductible only to the extent that they exceed 2 percent of your AGI and can be bunched into either 2015 or 2016 so as to exceed applicable deduction floors.
There were not a lot of significant changes to the tax laws during 2015, however, a number of important business deductions may be lost unless legislation introduced by congress in 2015 is passed by Congress and signed into law. See below for select changes and items that may be lost if not extended.
Select Tax Law Changes for 2015
- Partnership Return Due Dates – the due date for partnerships returns has been moved up to coincide with the due date of S corporation returns. It is now the 15th day of the third month after the close of the partnership tax year (generally March 15th).
- C Corporation Return Due Date – the due date for C corporation returns has been moved back to the 15th day of the fourth month after the close of the corporation tax year (generally April 15th). However, there is an exception for C corporations with a June 30 fiscal year. The due date for filing a June 30 C corporation return remains the 15th day of the third month following the end of the year (i.e., September 15) for the next 10 years.
Potential Tax Extender Legislation
- Section 179 Deduction Limitation – the legislation would restore the $500,000 expense limit for 2015 and 2016.
- Bonus Depreciation – the 50% bonus depreciation for assets placed in service during 2014 (through 2015 for certain transportation and other property) will not be available in 2015 unless extended.
Contact our tax planning experts for assistance in making every tax season less taxing.