2015 Year-End Tax Planning for Individuals

The first day of Fall is our signal to begin year-end tax planning. While the 2015 tax season may seem a ways away, you will be in better shape for the April deadline if you start the planning process now. Over the past year, we saw significant news come from the Supreme Court—from the decision to strike down state bans on same sex marriage to upholding subsidies for health care purchased on the federal exchange. This article will highlight some of these changes, as well as ways for individuals to reduce their tax burden as they plan for the upcoming tax season.

2016 Tax Deadline
It is important to note that for most states the April 15 tax deadline has been changed to Monday, April 18. Emancipation Day will be observed in Washington D.C. on April 15, and under the tax code, a holiday in the nation’s capital is considered a federal holiday. Maine and Massachusetts residents have even more time to file, as they will be observing Patriot’s Day on April 18, so the deadline for them has been changed to Tuesday, April 19.

Supreme Court Decision on Marriage
In a 5-4 vote on Friday, June 26, the Supreme Court ruled that same-sex marriages were legal nationwide and could no longer be banned on a state-by-state level. This decision not only requires all states to issue marriage licenses to same-sex couples, but it also means that no state can refuse to recognize a marriage that had taken place in another state. The tax ramifications will not affect same-sex couples who already resided in a state that recognized their marriage, but for those who didn’t, it could result in a filing status change and a potentially simplified tax filing process. Same-sex couples will no longer have different filing requirements at the federal and state level. This ruling means that couples will be able to leave an estate to their spouse without the worry of estate tax consequences; they will be able to take advantage of spousal treatment of inherited IRAs, and they will be able to gift each other property tax-free.

Supreme Court Upholds Subsidies
In another major ruling that rendered a 6-3 vote, the Supreme Court upheld subsidies for health care purchased on the federal exchange.This decision means that under the Affordable Care Act (ACA) the premium tax credits (or subsidies) are available nationwide, and not limited to only those states with their own insurance exchange.

Home Mortgage Interest Deduction Update
A recent decision made by the Ninth Circuit now allows the home mortgage interest deduction to be based on a per-taxpayer basis, not per residence, allowing unmarried taxpayers who co-own a home together to each deduct interest on debt up to $1,100,000. This decision was a reversal of the 2012 Tax Court case, which originally determined deductible interest was on a per-residence basis and not a per-taxpayer basis.

New ABLE Account
With last December’s extender package, a new type of savings account became available for families raising children with disabilities. The new savings account is called the Achieving a Better Life Account (ABLE). Currently, contributions can be made up to the annual gift tax exclusion amount of $14,000 per year, and distributions from the account are tax-free, if they are used on qualified expenses. According to the IRS website, some of the qualified expenses may include: housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other expenses.

Retirement Plan Contributions
When considering your retirement plans, contributing the maximum amount annually will help reduce your tax burden. By contributing now, you are able to reduce your taxable income and defer the taxes until later in life, a point at which you will most likely be in a lower tax bracket.

Timing of Income and Deductions
A method of planning that proves effective for taxpayers time and again is timing of income and deductions. By deferring income and accelerating your deductions, you can reduce your taxable income, and thereby defer and possibly reduce your tax. However, before you consider this strategy, you have to be sure you are not subject to the Alternative Minimum Tax (AMT). If you are subject to the AMT, then your timing will be the opposite of what is mentioned above.

Tax Extenders
“Uncertainty” remains a piece of the year-end tax planning puzzle. Will Congress renew the extenders?  If you recall, there were a number of extenders included in the Tax Increase Prevention Act (TIPA) of 2014; however, they expired on December 31, 2014. Unless Congress takes further action before the end of 2015, taxpayers will not be able to take advantage of these tax benefits. For individuals, we would like to see extensions for the 50% bonus depreciation on business assets, the $250 above-the-line deduction for educators, and the use of tax-favored accounts to pay for over-the-counter medications.

IRA Distribution to a Qualified Charity
One item we are always hopeful to see extended is the tax-free IRA distribution to a qualified charity. This deduction allows taxpayers over 70½ to make a direct transfer of their IRA distributions to an eligible charity. In past years, this transfer could be made tax-free, up to $100,000 per year, and is a great way to lower a taxpayer’s income.

Be Aware of Fraud and Identity Theft
While keeping an eye out for IRS phone scams and protecting yourself from identity theft may not reduce your tax burden, it will protect your overall well-being. There has been a significant increase in fraudulent activities, and we want to make sure you are protected. Please remember that the IRS will not initiate communication with you via email, and if you do receive a phone call where you are being asked for personal information or threatened with jail time for unpaid taxes, be wary. In the IRS’ own guidance they state:

“The IRS will always send taxpayers a written notification of any tax due via the U.S. mail. The IRS never asks for credit card, debit card or prepaid card information over the telephone. For more information or to report a scam, go to www.irs.gov and type “scam” in the search box.”

Possible Changes to Valuation Discounts
Taxpayers can reduce and sometimes eliminate federal estate and gift taxes through valuation discounts, enabling taxpayers to transfer significant amounts from one generation to the next. The Treasury Department has proposed new regulations, however, limiting valuation discounts for family partnerships and family businesses making them much less attractive as a planning tool. Currently, nothing is final, but it is definitely something to keep an eye on. Taxpayers may want to take advantage of using valuation discounts sooner rather than later as they may be restricted in the near future.

By getting an early start on your tax planning, we will be able to work together to develop the best strategy for your needs and goals. Should you have any questions please feel free to contact me at (805) 963-7811 or eboscacci@bpw.com. For further tax planning information, please visit our Web Tax Guide at https://www.bpw.com/resources/client-tools/.