Tax Year 2015: Top 10 Tax Planning Issues

FROM http://www.cpapracticeadvisor.com/

As 2015 draws to a close, a turbulent economic and legislative environment means taxpayers need to keep a close eye on several major planning issues, according to Grant Thornton LLP.

For example, more than 50 popular tax provisions expired at the end of 2014 and Congress has yet to extend them. Without legislative action, businesses won’t get a credit for research activities or be able to immediately deduct one-half of the cost of new business equipment. Individuals would lose benefits like the ability to deduct tuition or state and local sales taxes.

“Congressional inaction on tax extenders is not only causing headaches for businesses, but individual taxpayers as well,” said Mel Schwarz, partner and director of tax legislative affairs in Grant Thornton's National Tax Office in Washington, D.C.

“This climate of economic uncertainty is already making business and investment planning difficult, and Congress isn’t offering much help,” added Dustin Stamper, director in Grant Thornton’s Washington National Tax Office.

While lawmakers did manage to enact several pieces of tax legislation this year, that’s not necessarily good news – the most significant provisions are all tax increases. Congress attached several revenue raisers to a pair of trade bills and an even larger package of revenue raisers was used to finance a short-term extension of highway funding.

Grant Thornton’s Year-end Tax Guide for 2015 discusses these and all the issues taxpayers and taxpaying entities should be thinking about right now. Below are 10 of the most important 2015 tax planning considerations for individuals, executives and business owners. Taxpayers can also test their year-end planning knowledge with Grant Thornton’s interactive quiz.

1. Check on Congress. The most important thing you can do this year for your tax planning is to keep an eye on Congress to see whether lawmakers manage to extend popular tax provisions before the end of 2015. Some notable provisions must be extended in order to allow:

Taxpayers aged 70½ and over to make tax-free charitable contributions from individual retirement accounts (IRAs);
Businesses to deduct up to half of eligible equipment placed in service this year;
Teachers to receive an above-the-line deduction for $250 in classroom expenses;
Students and parents to receive an above-the-line deduction for tuition expenses;
Companies to receive a credit for qualified research expenses; and
Taxpayers in states without an income tax – like Washington, Texas and Florida – to deduct state sales taxes.

2. Document your business activities. You may not need to pay a 3.8 percent Medicare tax on your business income if you participate in the business enough so that you are not considered a “passive investor.” Participation is almost any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, you must document your activities, and the IRS will not let you make ballpark estimates after the fact. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.

3. Prepare your information reporting. You should start gathering information early this year to make sure you can complete your mandatory reporting on time. Congress has enacted new legislation that more than doubles most penalties for late or incorrect information returns. This includes the Form W-2 employers must provide to all employees and the Form 1099 a business must provide to any contractor it pays at least $600 for services. These returns are due to recipients by Feb. 1 and the IRS soon after.

4. Get your charitable house in order. If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented in order to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

5. Remember your state and local tax obligations. Don’t forget that state and local governments impose their own filing and payment responsibilities with various income, sales and property taxes. Recently, states have become more aggressive in taxing corporations that are not physically present in their states, but have significant sales to customers in those states.  While there may be exceptions for limited business activities in particular states, it is wise to check on your activities of your salespeople that often travel to different states to ensure you are filing all state corporate tax returns as needed.

6. Take a closer look at your state residency status.  For individuals who split their time in two different states throughout the year, now is an excellent time to consider where you may be taxed as a resident for 2015. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if you reside in a state for 183 days or more, that state will assert residency and the ability to tax all of your income. Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, bank accounts and the like), you could run the risk of being taxed as a resident in the old state.

7. Accelerate deductions and defer income. Why pay tax now when you could pay later? The time value of money can make deferring tax almost as valuable as escaping it. Generally, you want to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

8. Manage your gains and losses. Capital gains and losses present excellent opportunities for deferral because you have nearly complete control over when you sell them, but be careful when harvesting losses. You generally cannot use capital losses against other kinds of income, and if you buy the same security within 30 days before or after you sell it, you cannot use the loss under the wash sale rules.

9. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

10. Make up a tax shortfall with increased withholding. Don’t forget that certain kinds of taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

It Isn't Too Early to Start Planning Your Tax Strategy

FROM www.mainstreet.com

Welcome to the third quarter, when it's time to start thinking of 2015 as a tax year rather than the buffer between yourself and your next filing.

Though the end of the year is still a little more than two months away, financial advisors would like to remind you that there are a bunch of year-end tax moves you can make to reduce the bill you'll get from Uncle Sam. If you're lucky, a couple of them just might even send some more money your way. them move those assets back into your pocket.

“As we enter the end of the year, taxes are on many of our clients’ minds,” says Mike Lynch, vice president of strategic markets at Hartford Funds. “We encourage reps and clients to think about this all year long, so that we aren't scrambling at the end of the year by discussing being tax diversified.”

Granted, this year Congress is making advanced planning for the 2015 tax season a little more difficult than it has to be. With no budget in place and the threat of a government shutdown still looming, a whole lot of your potential deductions are still in limbo.

“We're still waiting on Congress to extend the budget, so a lot of things that we typically have we don't right now,” says Mike Greenwald, partner at Friedman, LLP. “We don't have bonus depreciation and we're waiting on Congress to see if they'll re-enact the state and local sales tax deduction. We don't have that, we don't have the $250 educator deduction and we don't have a lot of the student loan deductions, because they expired at the end of '14.”

Just don't use Congress's intractability as an excuse. It typically helps if you've been taking a sound approach to your taxes year-round. Rebecca Pavese, a certified public accountant and financial planner with Palisades Hudson Financial Group’s Atlanta office, notes that a healthy first step involves getting organized and taking a look at tax contributions you may not have changed since your employer hired you. Even if you have tinkered with your withholdings, make sure the IRS is getting enough of a cut to keep them from looking for more after you're filed.

”If you adjusted your tax withholding during the year in order to keep a cash buffer on hand, make sure you haven’t fallen short of meeting your obligations for the year,” Pavese says. “If necessary, adjust your December withholding, which may help eliminate the prospect of estimated tax penalties and interest. You can adjust your withholding by submitting a new W-4 form to your employer.”

Even if you've taken that step, the simple matter of spreading money around to taxable, tax-deferred, and tax-free accounts can likely be solved at the workplace as well. Pavese suggests starting off by maximizing your retirement savings to minimize the tax hit.

“Increasing contributions to many sorts of retirement plans, including 401(k)s and IRAs, will reduce your adjusted gross income,” she says. “If your per-paycheck contributions are not enough to hit the contribution limit for the year, you can ask your employer to deduct a one-time lump sum to catch up. At a minimum, 401(k) plan participants should contribute enough to take full advantage of any company matching.”

The easiest way to knock down that adjusted gross income by beefing up your “above the line” deductions across the board. Yes, that includes IRA contributions, but it also encompasses health savings account contributions and qualified moving expenses. Even if you pay state income taxes before December 31, you can deduct them on your federal return after sending an estimated payment.

Why do this, you ask? Well, if you can hold your adjusted gross income to $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay 0% tax on sales of assets you’ve held longer than one year and 0% on dividends. Even if you can’t get your AGI that low, you may be able to step down to the next lowest capital gains tax rate. Since many deductions are calculated by your adjusted gross income, knocking it down can make those less daunting.

“Unreimbursed medical expenses can only be deducted if they exceed 10% of AGI, for example,” Pavese says. “On the other hand, if you expect to be in a higher tax bracket next year than you are this year, deferring deductions where possible can potentially help you pay less tax in the long run.”

Beyond that, you may also want to look into your broader investment portfolio for some savings. The Hartford Fund's Lynch notes that selling out of a fund or stock by the year's end can help diversify holdings and, at the very least, can give you a loss to deduct.

“Is this a long-term investment or something I might be better off without and no longer fits my long-term needs?” he says. “Can I take advantage of a loss, or do I already have a prior loss in something that I can take advantage of? These exact questions should be covered with both tax and financial professionals.”

Those losses can eventually add up to big savings. If you're attentive enough to recognize your losses on a yearly basis, loss selling can help you whittle down future tax hits even if you're not particularly worried about this year's numbers.

“Simply put, tax loss selling is a strategy to minimize capital gains on one asset by realizing a loss to offset it,” Pavese says. “You can also carry tax losses forward indefinitely, so if you don’t end up needing to offset capital gains right away, you can use the loss to offset a gain in a future year.”

“Keeping inventory of donations should ideally be done throughout the year, but for those of us that may have given goods or money early in the year, tracking the receipts can be difficult,” Lynch says. “Now might be time to look at the junk drawer, that drawer in the corner of the kitchen where old receipts go to die. Make a folder and start putting those receipts in it.”

You can donate cash, sure, but there's also a way to get a deduction by giving away your high-performing assets. If you purchased shares for $1,000 and they are now worth $10,000, giving those shares to a qualified charity would give someone in the 28% tax bracket a $2,800 tax deduction based on the current market value of the shares. Also, if you're over 70.5 years old and have an IRA account, you're going to have to make your required minimum distribution before the end of the year to avoid penalties. However, if that's going to put you in dire straits with the IRS, Lynch says you may want to see if you can give your required minimum distribution directly to the charity of your choice.

Failing all of that, keep in mind that the upcoming season of giving extends beyond charities. Yes, even certain presents are deductible.

“We like to remind clients of the gift tax exclusion: you can give $14,000 per donor without incurring a gift tax,” Greenwald says. “If you want to give money to your kids or you're fortunate enough to have rich kids who want to give money to their parents, you want to make sure you don't miss that at the end of the year, because you can't use this year's exclusion next year.”

Taxing Issues for Independent Contractors and Freelancers

FROM NASDAQ.COM

Independent contractors and freelancers may have income and expenses that fluctuate wildly over months or years, so financial advisors need to know how to counsel those clients on the best strategies for planning their cash needs for tax purposes

Employees who have income withheld are less likely to run into problems over timely tax payment, but independent contractors need to plan their estimated installments.

“They should consider their expected tax liability as an expense, and they should budget for it like they budget for anything else,” says Rosemarie Moeller, a certified financial planner and managing director at Freedom Divorce Advisors, a division of AEPG Wealth Strategies in Warren, N.J.

Advisors and accountants must work closely with clients to estimate their expected tax liability for the year, which is 100% or 110% of the previous year’s taxes, depending on earnings.

Accountants advise their clients to take that amount and treat it like a mortgage or any other fixed expense, setting aside the money each month to pay for the quarterly installments to the government.

“You’re estimating, and the government knows that, but they want it evenly distributed, unless you didn’t pay three-quarters of your taxes because you didn’t expect this huge check to arrive in the fourth quarter of the year,” Moeller says.

Large fluctuations in income or deductions should balance out, if the projections are accurate.

“If you keep ending up under or over the projections, then we’ll want to talk about it and do an updated projection,” says Jeffrey M. Mutnik, a certified public accountant and director of taxation and financial services at Berkowitz Pollack Brandt with three offices in Florida.

“It always gets me when people say they’re so happy they are getting a refund they didn’t know they were getting or they’re so upset that they owe money and they didn’t know that they owed it,” he says. “That’s something they should have known at some point during the year; they should have had some type of projected income versus income taxes.”

For independent contractors, that knowledge can be crucial in obtaining tax savings. Especially toward the end of the year, independent contractors may be able to exercise some leeway over when they are paid or when they make payments.

“Maybe they can withhold making a payment until January and get a deduction the next year when they’re expecting to have a larger boom,” Mutnik says.

He warns that clients need to understand that payments are considered received when they are collected, not when they are deposited in the bank.

“If somebody pays you on Dec. 28 by check and you just put it in a drawer and deposit it in the bank on Jan. 3, that’s still a December collection,” Mutnik says. “The fact that you didn’t deposit it doesn’t mean anything.”

5 Tax Tips for Home Sellers

FROM NASDAQ.COM

For home sellers, times changed dramatically almost two decades ago in the tax-planning world.

No longer -- indeed not since 1997 -- do they need to buy a new house in the same year as they sell theirs to have any capital gains from the sale qualify as tax-exempt.

Under the post-1997 rules, homeowners each may receive a maximum of tax exemptions on the capital gains from the sale of a residence or $500,000 per couple, says Chad Smith, a wealth management strategist at HD Vest Financial Services, which is based in Irving, Texas. 

To qualify for the tax break, the home sellers must each meet Internal Revenue Service-set tests of ownership and use, in other words, owning and using the home during two of the five years prior to the transaction.

“Keep track of any remodeling,” as those upgrades may be deducted from a client’s basis when calculating the capital gains, Smith says. 

Notably, however, maintenance costs may not be similarly deducted from a client’s basis.

The remodel of a kitchen or bathroom may be deducted, as would an addition, the replacement of a roof, the paving of a driveway, the installation of central air conditioning or a rewiring of home. But the replacement of a water heater wouldn’t.

Homeowners should consistently keep track of their remodeling expenditures, so that they have them all in one place when it is time to report the gains on a sale, Smith says.

Sellers of rental residences who fail to meet the IRS’ use test, should consider buying another

real estate-related asset to avoid the capital gains tax and consider specifically what is known as 1031 exchanges, named after a section of the tax code that allows for the exemption, Smith says.

Under Section 1031 of the tax code, as interpreted by the courts, the seller of a non-residential property may execute a deferred exchange and within a set period invest in a like property, meaning U.S. real estate.

The 1031 option has grown in attractiveness for clients who want to extricate themselves from the hassles of renting real estate, who won't want to be landlords with tenants calling in the middle of the night, Smith says.

One other, often-forgotten caveat is that home sellers who expect to sell their residence for less than they paid -- at a loss – shouldn’t look to Uncle Sam for help.

“There is no relief in the tax code for those people, and we are seeing quite a bit of that these days,” says Mark Hyma, president of Professional Financial Services of San Diego, which uses HD Vest as its broker-dealer.

Read more: http://www.nasdaq.com/article/5-tax-tips-for-home-sellers-cm528379#ixzz3p8BHtcll

Issues to Consider with Irrevocable Trusts

FROM http://www.financial-planning.com/

Financial advisors should counsel their clients on the issues related to irrevocable trusts, as these tend to be complex.

When a grantor makes a transfer into an irrevocable trust, the individual essentially gives up their rights of ownership of the assets and the trust becomes a separate taxable entity, says Anjali Jariwala, founder of FIT Advisors in Chicago.

The trust may be subject to the 3.8% net investment income tax, which is triggered at relatively low levels for trusts by comparison with individuals, she says.

The threshold for the 3.8% surtax is $250,000 for a married couple but just $12,300 for a trust.

“Although the trust threshold is indexed for inflation, unlike the threshold for individuals, the level is still very low,” Jariwala says. “It is very easy for the income in the trust to reach the threshold amount.”

One way to mitigate the tax impact is to distribute the income out of the trust to avoid the 3.8% surtax, Jariwala says.

Assume that Trust A has $100,000 of interest and dividend income and $200,000 of capital gains. If the trust makes no distributions, the net investment income subject to surtax will be $287,700 ($300,000 income, less the $12,300 threshold).

If the beneficiary of the trust is an individual with adjusted gross income of $50,000, the trust can distribute the interest and dividend income of $100,000, Jariwala says.

The individual won’t be subject to the surtax because his income of $150,000 is below the threshold for an individual at $200,000, and the trust will avoid the surtax on $100,000 of its income.

Irrevocable trusts have to file their own tax returns on Internal Revenue Service Form 1041 instead of a 1040, says David D. Holland, chief executive and planner at Holland Financial Inc. in Ormond Beach, Fla.

An irrevocable trust is subject to the same tax breaks as an individual, but the difference between brackets is very short, he says.

A trust can get to the highest bracket of 39.6% with just $12,301 of taxable income this year, while a married filing jointly couple would need more than $464,850 to be in the same bracket.

“The tax law is written in a way to encourage individuals or families with these trusts to disburse the income out to the trust beneficiaries who then pay tax on it. Given the difference in tax treatment, it’s often better to be taxed at the individual level and not at the trust level,” Holland says.

Creating And Building A Roth IRA

FROM Reinhart Boerner Van Deuren S.C.

Roth IRAs are powerful estate, financial and tax planning devices. Given their power for wealth transfer planning, it is important to understand the rules that apply to how Roth IRAs are formed and funded. This article will address these two issues.

The first important concept is that Roth IRAs are funded on an after-tax basis. That is, contributions to Roth IRAs are not deductible against your income tax and so eventually the amounts contributed can be withdrawn without being subject to income tax either.

There are four basic ways to fund a Roth IRA:

• Annual contributions.
• Rollover from Roth 401(k) plan.
• Conversion of funds from traditional IRA.
• Surviving spouse's rollover of deceased spouse's Roth IRA.

* * * * * * * * * *

1. Annual Contributions. The first approach to funding a Roth IRA is to make annual contributions. Only specified taxpayers are allowed to make contributions to Roth IRAs. Single taxpayers must have adjusted gross income of less than $131,000 (in 2015). Joint filers can make contributions, provided their adjusted gross income is under $193,000. In addition, the taxpayer must have earned income at least equal to the amount of the Roth IRA contribution. Finally, the annual contribution is limited to $5,500 for taxpayers who have not attained age 55 during the calendar year in which the contribution is made. For taxpayers who have attained age 55 in the calendar year, an additional $1,000 annual "catch-up" contribution is allowed, subject to the other limits described above.
2. Rollover from Roth 401(k) Plan. Some qualified plan sponsors permit participants to open a Roth 401(k) account. The operation of Roth 401(k) accounts is beyond the scope of this article, but for those participants who have Roth 401(k) accounts, the funds in the Roth 401(k) accounts can be rolled over to a Roth IRA at the same time and under the same circumstances as the pretax assets in the regular 401(k) account can be rolled over to a traditional IRA. Generally speaking, these rollovers will occur at the participant's retirement or other separation from service from the employer.
3. Conversion from Traditional IRA. The most typical approach for substantial funding of a Roth IRA relates to converting a traditional IRA to a Roth IRA. The rules for converting a traditional IRA to a Roth IRA have changed over the years, but at this time, there are no limits on the age of the IRA owner who can convert a traditional IRA to a Roth IRA, or the gross income of the owner in the year of the conversion. The only rule that applies is that the conversion will trigger ordinary income tax on the full amount that is converted from the traditional IRA to the Roth IRA, and therefore the person making the conversion must be prepared to pay that income tax liability. Although the owner of a traditional IRA can use funds from the traditional IRA to pay the income tax created by the conversion, financial planning generally suggests that optimal tax planning is achieved by using funds other than the traditional IRA to pay the income tax.
   
   Prior law created special rules to allow the income tax liability triggered by a Roth IRA conversion to be spread out over two years, or, in one case, over four years. These special tax rules no longer apply for Roth IRA conversions after 2010.
   
   Under certain circumstances, a taxpayer may wish to "undo" a Roth IRA conversion. For example, if the value of the assets that were moved from the traditional IRA to the Roth IRA substantially declined in value, the taxpayer may wish to "recharacterize" the funds back into the traditional IRA in order to avoid paying income tax on value that has "disappeared." A taxpayer can make a recharacterization of a converted Roth IRA provided the assets are moved back to the traditional IRA before the taxpayer files his or her income tax return (including extensions) for the year of the conversion. Only one conversion and recharacterization can be made for any calendar year. Recharacterizations can be made after the taxpayer's death provided that the decedent's income tax return has not been filed at the time of the recharacterization.
4. Surviving Spouse's Rollover. If a Roth IRA owner dies and leaves the Roth IRA to his or her surviving spouse, the surviving spouse can roll over the Roth IRA into his or her existing Roth IRA, or can open a Roth IRA and roll over the funds into his or her Roth IRA. As mentioned in a prior article, the surviving spouse is not required to take any distributions from the Roth IRA, but is free to do so if desired.

The year-end estate plan review

It’s like cleaning the basement for a yard sale — you don’t want to do it, but it feels great when it’s done.

I’m talking about a year-end estate planning review. There is no better time to do an estate planning review than December — now just a few weeks away.

A year can bring significant changes. For example, you could have had a job change, moved to a new state, received an inheritance, had a marriage, birth or death in the family, and started, bought or sold a company. Consider the annual review like regular car maintenance. Without it, you could find yourself in trouble at the worst possible time.

A current estate plan is essential for the preservation, management, and transfer of your wealth for tax and nontax reasons. It should include a full risk management review from how assets are owned or titled, to the type of insurance coverage and amounts you have. For example, you could have purchased a boat earlier this year, but forgot to update your insurance coverage to include it.

The first step is a review of your documents including wills, revocable and irrevocable trusts, power of attorney, health care powers of attorney, advanced directives, letters of direction, and life, property and disability insurance policies.

Review your documents

It sounds obvious, but individuals frequently neglect a document review for years at a time. Read them once a year to make sure they reflect your objectives. Questions you might ask include:

• Are there changes to the family structure this past year?
• Are you and your partner now married? Divorced?
• Are you reconsidering how you want your assets distributed?
• Have you changed your state of residence?
• Are your beneficiaries capable of managing a financial windfall on their own?
• Have you discussed your estate plan with your family?
• Does your family have adequate financial protection in case of death or disability?

Review your fiduciaries

For example:

• Are all fiduciary roles (executor, guardian, trustee, agent) filled by individuals who have the time, willingness and ability to serve in this capacity?
• Do the fiduciaries understand their roles and responsibilities?
• Would a corporate executor and/or trustee be appropriate as part of your fiduciary team?

Review for potential tax issues

At the federal level, there is an estate tax and generation-skipping transfer tax that can drain as much as 80 percent of your estate at death.  Income taxes can further erode your estate for assets, such as a 401(k)and individual retirement accounts, which may require planning. Planning for taxes is important.

• Have your assets increased so that federal and state tax planning may be needed?
• Does a decrease in assets call for a change in bequests, tax planning or distributions?
• Have you purchased real estate in another state?
• Are your assets titled appropriately to work with your estate plan?
• Are the beneficiary designations on assets like life insurance and individual retirement accounts current and working properly with your estate plan?
• Have you started, acquired or sold a business?
• Have you received an inheritance or expect one in the near future?
• Do you own your assets in a manner that maximizes asset protection opportunities?

It doesn’t have to be in December, but once a year, block out a few hours to review your estate plan. Your family will benefit from a well-maintained and up-to-date plan.

Plus, it gets you out of cleaning the basement, at least for a little while.