Year-End Tax Planning Ideas
November 9, 2015
Greetings!

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress's failure to act on 60 "extender " tax laws that include  a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). Below is a list of important tax breaks that we do not know the status as of today, along with some tax planning ideas for the remainder of the year.

Tax Breaks that Expired in 2014:
Expired Individual Tax Breaks:
  • 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
  • The provision which allows tax-free IRA required minimum distributions to be given directly to a charity in a tax-free manner for those persons 70-1/2 or older
Expired Business Tax Breaks:
  • 50% bonus first-year depreciation for most new machinery, equipment, and software
  • The very important provision which allows a business to deduct up to $500,000 annually of any new or used equipment purchases (Section 179 - this is now reduced to $25,000)
  • The research tax credit
  • The 15-year depreciation expense allowed for qualified leasehold improvements, qualified restaurant buildingsand improvements, and qualified retail improvements
         Despite the current uncertainties, keeping the line on your taxable income is more important than ever given today's high top tax rates and additional taxes on net investment income. But, keep in mind that effective tax planning requires considering both this year and next year, at least. Without a multi-year outlook, you can't be sure maneuvers intended to save taxes on your 2015 return won't backfire and cost additional money in the future.
  
          In the next section are a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.
Year-End Tax Planning Moves and Ideas for Individuals
  1. Realize losses on stock while preserving your investment position. One such way is to sell your original holding, then purchase it back at least 31 days after you have sold it. Another strategy is to purchase a mutual fund/ETFs which have large holdings in the stocks you sold.
  2. Postpone income until 2016.
  3. If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA. Keep in mind, however, that this is a taxable transaction and will increase your AGI for 2015.
  4. It may be advantageous to try to arrange with youremployer to defer, until 2016, a bonus that may be coming your way
  5. Consider moving charitable deductions you normally would make in early 2016 to the end of 2015. If you're temporarily short on cash, charge the contribution to a credit card as they are deductible in the year they are charged, not the year the payment is made.
  6. Consider "supercharging" your contributions by giving to charities that qualify for the Colorado Child Care Credit which results in a 50% Colorado tax credit on top of the Federal and State tax deduction.
  7. You may want to prepay, in December, your Colorado fourth quarter estimates to obtain a 2015 deduction.
  8. Consider prepaying your real estate taxes in 2015 which are payable in 2016.
  9. Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you can maximize more dollars for this year.
  10. Make sure you have adequate health insurance coverage.  If you do not have this "minimum essential coverage", you may be subject to a penalty for 2015.
  11. If you are eligible to make health savings account (HSA) contributions, you should make a pre-tax or tax deductible contributions to an HSA.  You can contribute up to $6,650 for a family coverage or $3,350 for individual coverage.  Individuals who are over 50 can increase this amount by $1,000.
  12. Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax Planning Moves and Ideas for Businesses and Business Owners

  1. Businesses should buy machinery and equipment before year- end to start depreciation expense.
  2. A corporation (and any individual for that matter) should always look for ways to level income between years rather than just looking at the current year and trying to reduce income that year.  Because the federal income tax rates for businesses and individuals are graduated (starting at 10% and going to 43.4% for individuals) a person can save significant dollars from moving income or deductions from one year to the next and level their taxable income at a rate of say 25% rather than having the rate in one year be 15% and the next year be 43.4%.  Note - they did save money in the first year but combined taxes paid over the two years could be significantly higher.
  3. Although the business property expensing option is greatly reduced to $25,000 in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions.
  4. A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.
  5. One planning idea is if a corporation anticipates a small net operating loss (NOL) for 2015 (and net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income to create a small amount of net income for 2015. This will result in less tax in both years and a reduction in 2016 estimated income taxes.
  6. If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.  You may need to infuse some cash into the entity prior to year end.

These are just some of the year-end steps that can be taken to save taxes. We can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks noted above, to assure that you do't miss out on any tax-saving opportunities.

  

Please contact us at (970) 223-2727 with any of your questions or concerns regarding tax planning, or if you would like additional information.