YEAR-END INDIVIDUAL PLANNING
As in years past, there may be value in the customary year-end methods of shifting income. Taking stock of income and expenses to determine whether measures to defer or accelerate one or the other, before the close of the current tax year, should be considered as applicable at year-end 2015 as it has been in the past. As markets continue to adjust and fluctuate, it makes sense to evaluate current gains and losses to fashion a year-end buy, sell or hold strategy.
Income and Capital Gains/Dividends
The income tax rates for individuals for 2015 remain the same from 2014: 10, 15, 25, 28, 33, 35 and 39.6 percent (although the start of each bracket continues to be adjusted upward each year for inflation). The tax rates for qualified (net long term) capital gains and dividends also remain the same for 2015. The capital gains tax rates are keyed to the general income tax brackets, and range from 20 percent for those in the 39.6 income tax bracket, down to 15 percent for those within the 25 to 35 percent brackets, and to zero percent for those in the 10 or 15 percent income brackets.
Spikes in income may raise capital gains into either the 39.6 bracket (for short term gains) or the 20 percent capital gains bracket. Distributing the identification of certain income between 2015 and 2016 may help decrease the total tax paid during the 2015 and 2016 tax years. Individuals who are in the 10 to 15 percent bracket should likewise consider identifying any long-term capital gain available to the limit that, with other expected income, will not surpass the ceiling of the 15 percent bracket ($74,900 for joint filers and $37,450 for singles in 2015).
Some taxpayers may also use the strategy of searching for a short-term investment such as bonds, payable into next
year, which is intended to defer the realization of any taxable income from 2015 to 2016. The taxpayer would not identify income from any such investments until the date in 2016 when the investment matured.
It is important to keep in mind that marital status (single, married or divorced) for the entire year is established on December 31. Due to differing income tax brackets based upon filing status, marriage may carry a tax benefit or a penalty for any particular couple. If each partner has approximately the same amount of income as the other, the couple will typically pay more in combined tax filing a married, joint return rather than as two single individuals. Expediting or delaying marriage or divorce at the end of the year might be advisable given this difference in tax brackets.
Net Investment Income (NII) Tax
Since the inception of the NII tax, individuals have discovered that NII encompasses more than capital gains and dividends. Any income from a business in which the taxpayer is a passive participant is also included in NII. Unless it is earned by a real estate professional, rental income may also be deemed NII. The threshold amount for NII is equal to: $250,000 on joint returns or for a surviving spouse, $125,000 for a married taxpayer filing a separate return, and $200,000 in any other instance. There is no indexing for inflation with these threshold figures.
Keeping modified adjusted gross income (MAGI) below the NII thresholds, if possible, is an approach to consider. Offsetting the income with above-the-line deductions or dispersing income over a number of years are two viable courses. Spikes in income should once again be prudently managed.
The NII tax is not associated with the Additional Medicare
Tax. Individuals who expect liability for Additional Medicare Tax can ask their employers to deduct an
additional amount of income tax withholding prior to year-end. This added amount will be applied against taxes listed on the individual taxpayer’s income return, including any Additional Medicare Tax, and help avoid any estimated tax shortfall.
Alternative Minimum Tax (AMT)
The AMT exemption amounts in 2015 are $53,600 for single individuals and heads of household, $83,400 for married couples filing jointly and surviving spouses, $41,700 for married couples filing separate returns.
No one factor inescapably creates AMT liability, but some typical factors are itemized deductions on state and local income taxes; itemized deduction for miscellaneous expenses; itemized deductions on home equity loan interest (not including interest on a loan to buy, build, or improve a residence); and changes in income from installment sales. Investments, particularly in oil and gas, may also result in “tax preferences” that can add up to AMT liability.
Pease Limitation/Personal Exemption Phase-out
The Pease limitation threshold for 2015 is $309,900 for married couples and surviving spouses; $284,050 for heads of households; $258,250 for unmarried taxpayers; $154,950 for married taxpayers filing separately. The adjusted gross income threshold amounts for the personal exemption phase-out (PEP) are the same as the thresholds for the Pease limitation.
Individuals may prevent the possible decrease in the amount of personal exemptions and certain itemized deductions by managing adjusted gross income in addition to affected itemized deductions. In respect to the limitation on itemized deductions, a taxpayer’s total itemized deductions do not include deductions for medical expenses, investment interest expenses, casualty or theft losses, and allowable wagering losses.
In the case Obergefell, 2015-1 USTC 50,357, the U.S. Supreme Court ruled that the Fourteenth Amendment mandates that a state must license a marriage between two people of the same sex. Also as part of this ruling, it was decided that states must recognize a marriage between two people of the same sex when their marriage was lawfully performed and licensed out-of-state. Obergefell was not a tax case, and yet the Supreme Court’s decision will impact same-sex married couples in several ways including tax return filing, employee benefits and health care.
Tax Extenders for Individuals
There are a number of popular but temporary tax incentives under current law that are not available for 2015 unless extended by Congress. For individuals, these incentives include the state and local sales tax deduction, the higher education fees and tuition deduction, a mortgage debt forgiveness exclusion, the classroom expense deduction for teachers and the Code Sec. 25C residential energy property credit.
Child Tax Credit
The Trade Preferences Act of 2015 establishes new limits on the child tax credit for taxpayers who choose to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. The refundable portion of the child tax credit for the tax year will not be an allowable claim for these taxpayers.
Estate and Gift Taxes
The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5 million exclusion for gifts made and estates of decedents dying after December 31, 2012. The annual gift tax exclusion allows taxpayers to give up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts) gift-tax free and without counting the amount of the gift toward the lifetime $5 million inflation-adjusted exclusion.
The $14,000 ($28,000) annual exclusion is a use-it or lose-it benefit; it resets every January 1st but cannot be then retroactively taken for the prior year. The applicable inflation-adjusted exclusion amount is $5,430,000 for gifts made and estates for decedents dying in 2015. This exclusion rises to $10.86 million when spouses combine exclusions.
Under the Heroes Earnings Assistance and Relief Act Tax Act of 2008, the IRS proposed regulations that apply to transfers of property from individuals who have abandoned U.S. citizenship or residency and who later make a gift or bequest (a “covered” transfer) to a U.S. taxpayer (either an individual or a domestic trust).
Individuals cannot escape the tax by making transfers before a certain deadline. The tax itself has been applicable since 2008.
Year-End Retirement Planning—Employer Plans
One of the initial steps in saving for retirement is to contribute to an employer-sponsored elective salary deferral plan (especially to the amount of an employer match). These salary deferral plans include 401(k) plans, 403(b) plans, and 457 plans (depending on the form of employment).
The inflation-adjusted elective salary deferral limit for 2015 for 401(k), 403(b), and 457 plans is the lesser of $18,000 or 100 percent of compensation. If an employer makes contributions, the total contribution from both the employee and employer is capped at $53,000 (not including an additional $6,000 for catch-up contributions). Plans vary as to the extent of the ability to increase contributions at year-end.
myRAs could be considered “starter IRAs” in that they cap out at $15,000 or 30 years, whichever comes first. The account is governed by all the other tax rules associated with regular Roth IRAs. However, myRAs have no fees and can be opened for as little as $25 via payroll direct deposit. The account balance will never go down in value, and like U.S. savings bonds and other Treasury securities, the security in the account is guaranteed. It is available to anyone who currently has an annual income of less than $129,000 a year for individuals and $191,000 for couples; but only through an employer, whose participation is not mandatory.
AFFORDABLE CARE ACT—INDIVIDUALS
The ACA requires that all individuals, unless exempt, carry minimum essential coverage or make a shared responsibility payment. Individuals with existing health insurance coverage should determine that their coverage satisfies the ACA’s minimum essential coverage requirements. Individuals without minimum essential coverage, unless exempt, could be liable for a shared responsibility payment. Individuals who acquire health insurance coverage through the ACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit.
The coverage requirement is applicable on a month-to-month basis. Individuals are deemed as having minimum essential coverage for a month as long as the individual has coverage for at least one day during that month.
Several exemptions to the ACA coverage requirement are available to qualified individuals:
- Exemption for members of federally-recognized Native American nations.
- Exemption for members of a health care sharing ministry
- Exemption for incarcerated individuals
- Exemption for individuals not lawfully present in the U.S.
- Hardship exemption
- Religious conscience exemption
- Short coverage gap exemption
Generally speaking, a gap in coverage lasting less than three months qualifies as a short coverage gap. If a taxpayer has more than one short coverage gap in the course of a year, the short coverage gap exemption only applies to the first gap.
Individual Shared Responsibility Payment
The individual shared responsibility payment for 2015 is the greater of two percent of household income that is above the tax return filing threshold for the individual’s filing status, or the individual’s flat dollar amount, which is $325 per adult and $162.50 per child, limited to a family maximum of $975, but capped at the national average premium for a bronze level health plan available through the Marketplace. For 2015, the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through the Marketplace is $207 per individual and $1035 for a shared responsibility family with five or more members.
Open enrollment has closed for 2015 for coverage through the Health Insurance Marketplace. However, some qualifying life events may make an individual eligible for non-filing season special enrollment. A taxpayer experiencing complex circumstances may also qualify for special enrollment.
Health Flexible Spending Arrangements
Contributions to health flexible spending arrangements (FSAs) are indexed for inflation and are capped under the ACA at $2,500. An employee will be subject to tax for any distributions from the health FSA for any salary reductions in excess of the cap. For both 2015 and 2016, the cap is $2,550.
Health FSA balances are use-it or lose-it for each year except to the extent that a plan provides a $500 carryover.