December 2015
Dear Client:
The purpose of tax planning is summed up in the following quote, “You must pay taxes. But there’s no law that says you gotta leave a tip.” As 2015 draws to a close, there is still time to make the most of strategies that can help reduce your tax bill and allow you to reap other potential financial benefits. This letter is an overview of some key year-end tax planning strategies. In addition, our business and farm planning worksheets can be accessed on our website: www.brsw-cpa.com.
Please review the enclosed information and give us a call to discuss further. Our mission is to provide tax, accounting, and advisory services to enable your success and we appreciate the opportunity to serve you.
No New Tax Brackets
For tax year 2015, marginal income tax brackets are expanded slightly above 2014, with the highest rate still being 39.6%, which was introduced in 2014.
RATE SINGLE MARRIED (JOINT) HEAD OF HOUSEHOLD
10% $0–$9,225 $0–$18,450 $0–$13,150
15% $9,226–$37,450 $18,451–$74,900 $13,151–$50,200
25% $37,451–$90,750 $74,901–$151,200 $50,201–$129,600
28% $90,751–$189,300 $151,201–$230,450 $129,601–$209,850 33% $189,301–$411,500 $230,451–$411,500 $209,851–$411,500 35% $411,501–$413,200 $411,501–$464,850 $411,501–$439,000
39.6% $413,201 and up $464,851 and up $439,001 and up
What’s New That Affects You?
The good news for taxpayers this year is that no dramatic changes are in store. However, the possibility of additional taxes triggered by new deductions or additional income could affect your tax bill or refund. However, unless Congress acts, several tax breaks will expire at the end
0% for taxpayers in 0–15% tax brackets 15% for taxpayers in
middle-income tax brackets
20% for taxpayers in the highest tax bracket (39.6%)
of 2015 (or have already expired). Key tax breaks awaiting renewal include the deduction for state and local sales tax, credits for buying energy-efficient appliances or certain energy-saving home improvements, and exclusion of mortgage debt cancellation (up to $2 million) from taxable income. We can explain how certain tax provisions may affect you, identify long-term strategies and discuss steps you can take now to reduce your tax
liability.
Dividend and Capital Gains Rates Unchanged
The top tax bracket for dividends and capital gains in 20% (23.8% if net investment income applies). Here is the breakdown:
Review Your Approach to Health Insurance Costs and Coverage
Do you have health insurance coverage? If not, you will likely face a penalty. Under the Affordable Care Act, the amount you had to pay for failure to have coverage started out relatively low, up to a maximum of $285 per family in 2014. It jumped to a maximum of $975 this year, and it is set to more than double again in 2016, to a maximum of $2,085 for each family. If you have health insurance you should receive forms 1095A, B or C as verification of coverage for your income tax return. Also, if you received health insurance subsidies on the government exchanges and your income increased, you may have to repay some of those advance credits on your income tax return.
Besides avoiding the penalty, another way to lower your taxes is to take advantage of medical flexible spending accounts (FSAs), which allow you to set aside pretax dollars to cover unreimbursed medical bills. This year, you can contribute up to $2,550 to an employer-sponsored FSA. And, unlike in the past, instead of losing all of your FSA contributions if you do not use them by year-end, you can now carry over as much as $500 from one year to the next.
If you are enrolled in what the IRS defines as a high-deductible health plan, you might be eligible to contribute to a health savings account, which can offer you a pre-tax option for covering your deductible. In 2015, the contribution limits are $3,350 for individuals and $6,650 for a family. And there is no time limit on when you can use your contributions to cover unreimbursed qualified medical expenses.
Now is the time to review and update your health insurance benefits and make any necessary changes to maximize your coverage options, tax benefits, and avoid last-minute surprises when you file your taxes.
Social Security Changes
The Bipartisan Budget Act of 2015 (the Act), signed by President Obama on November 2, 2015, eliminates the file and suspend method, a popular strategy used by married couples to maximize their lifetime Social Security benefits. Under this approach, a higher earning spouse claims benefits at his full retirement age (currently age 66) but suspends the benefits until a later date (e.g., at age 70 or sooner, if desired), allowing the Social Security credits to continue to grow. The lower earning spouse claims benefits based on the higher earning spouse’s earning record, which are more than the benefits based on his or her own earnings record. In a provision labeled “closure of unintended loopholes,” the Act effectively eliminates this opportunity for claims filed after April 30, 2016 (180 days after enactment).
The Act also eliminates the restricted application method (sometimes called the claim some now, claim more later method) for claiming Social Security benefits by married couples. Under this strategy, a spouse reaching full retirement age who is eligible for both a spousal benefit (based on his or her spouse’s earnings) and a retirement benefit (based on his or her own earnings) could file a restricted application for spousal benefits only, then delay applying for retirement benefits based on his or her own earnings record (up until age 70). This would allow the Social Security credits to continue to grow. For those who turn 62 after 2015, the Act eliminates the ability to file a restricted application for only spousal benefits.
Tax Benefits
While a few tax benefits are in limbo pending congressional action as stated above, many of the ones below are permanent however, they are generally subject to income limits. For example, the student loan interest deduction stops being available once a taxpayer reports $80,000 MAGI.
The child tax credit provides up to $1,000 per child under 17 including, but not limited to, son, daughter, stepchild and foster child. The child and dependent care tax credit provides 20-35% for paid care for children under 13, or a spouse or other dependent, who is incapable of self-care.
Education costs and credits are outlined in the table below:
Amount Coverage Notes
American Opportunity Tax Credit
$2,500 per student Covers undergraduate expenses such as tuition, books or equipment (extended through 2017). Lifetime Learning Credit $2,000 per student Qualified graduate or
undergraduate expenses. Tuition and fees deduction Up to $4,000 for taxpayer,
spouse or dependent
Applies to higher education tuition and fees. Cannot be claimed with other education credits.
Note: This provision expired Dec. 31, 2014, and cannot be claimed for 2015 unless it is renewed.
Student loan interest Up to $2,500 adjustment to income per return
Business and Self Employed Tax Issues
This year again brings uncertainty as to whether Congress will renew some provisions for immediately expensing business costs. We can explain the impact of these provisions, and help you navigate the uncertainty with business and cash-flow planning.
Address New Uncertainty about Expired Tax Benefits
Many taxpayers will remember past years when Congress waited until the last minute to decide if it would extend provisions set to expire at year-end. This time, several popular provisions expired at the end of 2014. Over the summer, a proposal emerged in Congress to renew many of these provisions for 2015, including these for businesses:
50% Bonus depreciation on new assets– Amount of deductible depreciation that is permitted above and beyond what would normally be available.
Increase in the maximum amount and phase-out of the section 179 threshold – Allows a taxpayer to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. The threshold is currently $25,000 and will increase to $500,000 should Congress pass an extender bill.
Research and Experimentation Tax Credit, also known as R&D Tax Credit – Helps companies that incur research and development costs.
Work Opportunity Credit – Available to employers who hire individuals from certain target groups who consistently have faced significant barriers to employment. Employers hiring residents of Van Wert or Paulding County should be prepared to submit applicable paperwork if this is extended to qualify for the credit.
Ohio Small Business Deduction Extended – A key provision to the state budget signed by Governor Kasich on June 30, 2015 is the continuance of a 75% small business income tax deduction on the first $250,000 of business income in
2015. This deduction increases to 100% in 2016 and beyond. Above $250,000 of business income, there is a flat 3% tax rate. With less tax to pay, business owners can invest additional money in their operations.
Prepare for the Next Rounds of Affordable Care Act Implementation
Employers should keep in mind that health reimbursement arrangements (HRAs) and similar plans generally have been eliminated except when used for selected benefits, including dental and vision care, long-term care and disability coverage. The penalties for employers that continue to offer these arrangements are steep, so be sure your plan complies. Employers with 50 or more full time equivalent employees must file forms 1094-C and 1095-C to report health insurance provided to employees to the IRS in early 2016 for the calendar year 2015.
Significant new reporting, disclosure and notification rules
related to continue implementation of the Affordable Care Act will become effective next year. Reviewing and planning now for these requirements may save you time and money in 2016.
Plan for New Regulations That Will Affect Your Business
New tangible property regulations apply to all taxpayers who buy, sell, improve or dispose of depreciable assets for tax years beginning on or after January 1, 2014. These rules affect a tremendous variety of property, e.g., laptops, copiers, roofs, and likely apply to your business. These regulations require certain annual elections in order to fully benefit from their taxpayer friendly provisions. Thankfully the IRS just raised the de minimis threshold from $500 to $2,500 for taxpayers without an applicable financial statement. Also, new rules revise some of the
procedures for requesting an automatic or advance change in accounting method, adding extensive changes for taxpayers under examination.
A law passed this summer sets new due dates for partnership and C corporation returns, as well as for foreign account reporting and several IRS information returns. These new dates will not take effect until the 2017 filing season, and we will advise you well in advance of any deadline changes that affect you.
Make the Most of Retirement Plan Opportunities to Lower Taxes
If you are not taking full advantage of the special retirement saving options for small business owners, you may be missing out on valuable tax deductions. A Simplified Employee Pension Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) and Solo 401(k)s feature contribution thresholds that can be significantly higher than those for other kinds of IRAs. In some cases, you can establish these types of plans for yourself and also offer them to employees.
Participants can contribute up to $53,000 to SEP IRAs and Solo 401(k)s in 2015, and those 50 or over can make additional catch-up contributions. For a SIMPLE IRA, the 2015 contribution limit is $12,500, and participants who are age 50 or older also can make catch-up contributions. These plans all feature a minimum of paperwork, maintenance and cost, so they are worth investigating while it is still possible to make 2015 contributions.
Sort Out Capital Gains and Losses
If you expect to face capital gain taxes this year, and are above the 15% marginal tax rate, loss harvesting can help reduce what you will pay. It involves selling any investment (including stocks, bonds, and mutual funds) that has declined in value since you acquired it so that the capital losses you report can offset your capital gains. You might also want to sell these investments as part of your overall investment strategy if, for example, there have been changes in the markets or in your investment goals during the year and you want to rebalance your portfolio to better reflect your financial needs. Also, do not neglect the potential tax consequences of mutual fund capital gain distributions, especially since many funds schedule their distributions around year-end. Please contact us to discuss the best steps to structure your portfolio to avoid or minimize taxable gains for this year.
Information Return Penalties Increased (Forms 1099, etc.)
Currently, the penalty for failure to file correct information returns or to provide a correct payee statement is $100 for each return for which such penalty occurs, up to $1.5 million per calendar year. The Trade Preferences Extension Act of 2015 increased the penalties to $250 per failure, up to $3 million per calendar year. The penalties are doubled to $500 for intentional disregard. The increased penalties are effective for returns to be filed after December 31, 2015.
If the payer takes corrective action, penalties are reduced. Currently, the failure is corrected within 30 days of the required filing date, the penalty is reduced to $30 for failure if the total amount of the penalties after the corrective action is $250,000 or less. The new legislation increases the penalty to $50 per failure and increases the threshold to $500,000. Currently, failures are corrected after 30 days but before August 1, penalties are reduced to $60 per failure as long as the total penalties after corrective action are $500,000 or less. The new legislation increases the penalty to $100 per failure and increases the threshold to $1.5 million. Penalty per failure Before January 1, 2016 After December 31, 2015 Corrective action within 30
days
$30 per failure and penalties are less than $250,000
$50 per failure and penalties are less than $500,000
Corrective action after 30 days but before August 1
$60 per failure and penalties are less than $500,000
$100 per failure and penalties are less than $1.5 million Corrective action August 1 or
later
$100 per failure $250 per failure Intentional disregard $250 per failure $500 per failure
Plan for the Alternative Minimum Tax (AMT)
It is estimated that nearly 4 million taxpayers were subject to the AMT in recent years, and that number is expected to grow. The AMT exemption rose for 2015, to $53,600 for single taxpayers and to $83,400 for married couples filing jointly. A wide range of AMT triggers could subject you to the tax, including many factors associated with substantial deductions. The good news is that there are ways to plan around the AMT, including accelerating or delaying income or expenses so you will be subject to the tax in one year but not another, lowering taxable income through retirement account contributions; or managing timing of capital gains or dividends.
Ohio Minimum Wage Unchanged For 2016
Ohio’s minimum wage is scheduled to remain unchanged for 2016 at $8.10 per hour for non-tipped employees and $4.05 per hour for non-tipped employees. The minimum wage will apply to employees of business with annual gross receipts of more than $297,000 per year.
The Constitutional Amendment passed by Ohio voters in November 2006 states that Ohio’s minimum wage shall increase on January 1 of each year by the rate of inflation. The state minimum wage is tied to the federally determined Consumer Price Index (CPI-W) for urban wage earners and clerical workers for the 12-month period prior to September. This national CPI-W index declined 0.3 percent over the twelve month period from September 1, 2014 to August 31, 2015. The Constitutional Amendment states that the minimum wage level shall increase at the rate of inflation, therefore, a decrease in the CPI-W index means that the Ohio minimum wage will remain the same as in the previous year.
For employees at smaller companies with annual gross receipts of $297,000 or less per year after January 1, 2016 and for 14- and 15-year-olds, the state minimum wage is $7.25 per hour. For these employees, the state wage is tied to the federal minimum wage of $7.25 per hour which requires an act of Congress and the President’s signature to change.
Avoid a Growing Problem: Tax-Related Identify Theft
Nearly 3 million people were the victims of tax-related identify theft in a recent year, according to a report from the U.S. Treasury Inspector General for Tax Administration (TIGTA). In a typical case, scammers use your identification number to get a fraudulent refund. You may not be aware that it has happened until you file your own return and are told by the IRS that another return has already been filed in your name. In the meantime, the scammer has collected a refund under your name. In other cases, taxpayers receive collection notices from the IRS for taxes they do not owe or referring to employers for whom they never worked. Please feel free to contact us for advice on how to respond to any tax notice you receive, as well as ways to avoid falling prey to identify theft and to spot potential signs that it has happened. You many also visit our website at www.brsw-cpa.com for a checklist of steps you should take to help mitigate the damage of identity theft should you fall victim.
Please call our office today (Van Wert: 419-238-0658, Paulding: 419-399-3686) to set up your year-end tax season review. Thank you for the opportunity to work with you and we wish you and your family a happy and blessed Holiday season.
Sincerely,
