Make these 3 moves before December 31; Save on taxes later

We're rapidly approaching the end of the year, which means we're focused on helping our clients make the best moves to help reduce their 2015 tax burden. 

Here's what to do:

Max out your 401(k) contributions. Per the IRS, you can contribute up to $18,000 to your 401(k) in 2015 -- plus an extra $6,000 if you're age 50 or older. That's a hefty $24,000 in savings. But you only have until Dec. 31, 2015, to make these contributions and get the attendant tax deduction.

If you simply can't get your act together before Dec. 31 but still want to save in tax-smart retirement accounts, rest easy. You have until April 15, 2016, to make tax-deductible IRA and Health Savings Account contributions. But be warned: Both savings vehicles' contribution limits are much lower than the 401(k) limits.

Organize to itemize. Every year you must decide whether you'll take the standard deduction on your income taxes or itemize your personal deductions. In 2015, the standard deduction is $6,300 for singles and $12,600 for those married filing jointly.

Examples of allowable itemized deductions include: some medical expenses (if they exceed 10 percent of your adjusted gross income -- or 7.5 percent if you're age 65 or over), state and local taxes, and charitable contributions.

If you want to itemize, you'll have to be organized, which means keeping track of every potential tax deduction to help ensure that they exceed the standard deduction. After all, if the total doesn't exceed the standard deduction, there's no point in itemizing.

Donate appreciated stock to charity. If you're charitably inclined and thinking about selling some appreciated stock to cover your typical donation, consider donating that stock directly to the charity of your choice. Why? They'll get the full benefit, instead of having a portion of it shaved off by the tax man. And -- if you itemize -- you'll reap the benefit of the full amount for tax deductions.

Here's how it works. Say you're in the 25 percent tax bracket, and you want to donate $10,000 to charity. If you sell Stock XYZ to obtain those funds, and you've held that stock for over a year, 15 percent of that $10,000 will be taxed at the long-term capital gains tax rate. In effect, you'll have only $8,500 left to donate.

If you donate $10,000 worth of Stock XYZ directly to charity, the charity would get the full $10,000 gift, as charities aren't subject to capital gains tax on donated assets. On top of that, you'd get to deduct the full $10,000.

While there's still plenty of time to make moves to lower your 2015 tax bill, remember that tax planning should ideally happen year-round, and applicable tax strategies vary widely from person to person. Consult a financial adviser or tax strategies specialist to learn what may be most beneficial for you on a year-to-year basis.

The information presented in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

It’s Not Too Early for Year-End Business Tax Planning

Businesses that expect to owe substantial taxes in 2015 can still take steps to soften the blow. However, a number of tax breaks, particularly ones related to depreciation, hinge on legislation that Congress might restore before it adjourns for the holidays. While there is still some uncertainty with respect to depreciation provisions, there are nevertheless still tax-saving strategies to consider before December 31.

Deduct Rather Than Depreciate

Manufacturers and distributors rely heavily on equipment, property and other fixed assets. Some of their biggest expenses are depreciation, supplies, and repairs and maintenance. Accelerating the deduction for these costs will lower this years taxes.

1.  Deduct costs under the repair regs. In general, the IRS’s final regulations for tangible property costs (commonly known as the “repair regs”) require most tangible property costs to be capitalized and depreciated over several years — rather than deducted in the current year — for federal tax purposes. However, the repair regs include provisions that may warrant additional qualifying purchases or improvements before year end to lower taxable income.

For example, companies can elect to immediately deduct items costing up to a certain threshold that would have otherwise been capitalized. Thresholds should be defined in a company’s capitalization policy. A $5,000 threshold typically applies to companies with applicable financial statements for the year.

A safe-harbor rule also allows businesses to deduct routine maintenance costs. In addition, taxpayers with average annual gross receipts of $10 million or less for the three preceding tax years can deduct improvements to an eligible building property if the total amount paid during the year for repairs, maintenance, improvements and similar items doesn’t exceed the lesser of 1) $10,000 or 2) 2% of the building’s basis before depreciation.

Incidental materials and supplies costs can be deducted in the year they’re paid or incurred. These costs, subject to a company’s capitalization policy, include expenditures for non-inventory items, as well as costs of non-inventory items with useful economic lives of 12 months or less regardless of the size of the expenditure. Consider accelerating purchases of these supplies to take delivery before year end.

2.  Make the most of Section 179 limits. For tax years beginning in 2010 through 2014, taxpayers could immediately deduct up to $500,000, with certain limitations, for purchases of qualifying new or used assets under Sec. 179. Included in this limit were new and used machinery, office furniture, computer equipment and purchased software.

As of this writing, the maximum Sec. 179 deduction for tax years beginning in 2015 is limited to only $25,000, with certain limitations. Manufacturers and distributors should take advantage of this allowance, but it’s possible that Congress could restore a higher Sec. 179 allowance before the end of 2015. It did so as the provisions were expiring and the calendar was closing on 2014. If that happens again, be prepared to act fast to lower your taxable income for 2015. Remember that assets must be placed in service by no later than the end of your business’s tax year to qualify for the Sec. 179 deduction.

Finally, there’s no word yet whether Congress will restore the 50% first-year bonus depreciation allowance for 2015 as it did at the end of 2014. This tax break applies exclusively to qualifying newequipment and purchased software that’s placed in service before year end — so also be prepared to act fast if 50% bonus depreciation is restored.

3.  Use Sec. 179 for real property improvements, if available. Real property improvement costs have traditionally been ineligible for immediate deduction under Sec. 179. But the tax law permitted an exception for qualified real property improvements placed in service in tax years beginning in 2010 through 2014. In those years, taxpayers could claim a first-year Sec. 179 deduction of up to $250,000 for 1) interiors of leased nonresidential buildings, 2) restaurant buildings and 3) interiors of retail buildings.

As of this writing, the $250,000 Sec. 179 allowance for qualified real estate improvements has expired. But again, taxpayers should be prepared to make property improvements near year end in case Congress, as it did for 2014, restores this tax break for tax years beginning in 2015.

Pay Attention to the ExtendersA long list of other federal income tax credits and incentives for businesses — including the research credit — expired at the end of 2014. These credits have expired and been extended in previous years, so extension of these credits again remains a possibility.

In the meantime, document qualifying expenditures and create wish lists of fixed asset purchases, improvements and other expenditures to take advantage of last-minute tax breaks that may be available for 2015. And, check with your tax advisor for the latest information — it’s possible Congress will have acted by the time you’re reading this.

Last-minute tax tips for Oct. 15 filers

FROM MARKETWATCH.COM

Oct. 15 is the annual filing deadline for personal income tax filers who filed for an extension.

Here are some tips to guide the frantic, last-minute filer:

• Do not file online within the last hour of the deadline. If your software doesn’t work, or you have Internet problems, you will end up missing the deadline.
• If you are planning to file on paper, check with your local U.S. post office facilities to see which branches will be post-marking mail up until midnight. Do this in advance, so you know exactly where to go. And show up at least a half hour before closing.
• You still don’t have everything you need in order to file a complete return. Too bad! File anyway. There is a 5% per month late filing penalty if you miss the Oct. 15 deadline. There is no late filing penalty if you file something.
• Don’t file a frivolous return just into order to file something. Make reasonable estimates of the missing income, expense, or tax basis of assets you sold. Make written notes about how you arrived at those estimates and put those notes into the tax return files you keep at home.
• When you get the correct information later, file an amended tax return. Remember, you have up to three years to file an amended return, after you file the original return.
• If you are working with a tax professional, do not walk into his or her office proudly at the last minute and expect them to appreciate you. They are human, and their nerves are already stretched to the limit trying to help procrastinators. Expect to pay huge rush fees — or expect to be filing late. After all, while you might get away with filing a quick and sloppy tax return — they must do a diligent job.
• If you need to make a payment with your tax return, use the IRS’s Direct Pay tool. It’s free, draws the money directly from your account, and gives you proof that the IRS received your payment — and shows how the payment was applied.
• What if you don’t have the money to pay the taxes that are due? That’s one of the biggest reasons people avoid filing their tax returns. Forget it. File anyway. You will have to pay those taxes sooner or later. And isn’t it easier to pay the balance due without 25% worth of penalties — and the interest on those penalties and the taxes?
• If you can ultimately find the funds to pay your balance due within about three months, do so. If not, you can always arrange for an installment agreement with the IRS — often painlessly — using their Streamlined Installment Agreement tool online. This should work for most taxpayers, since the allowable tax debt to qualify is $50,000.
• Whatever you file, keep a printed (or PDF) copy of your tax returns and all the forms, notes, 1099s, W-2s, etc. that went into producing the information reported on your tax return. Make copies of all payments — printing out any online payments.

Overall, the most important thing you need to know this week is — file. Don’t put it off because you’re frustrated, afraid, or confused. When you file, the stress is off.

Tax Planning Businesses Can Do Before Year End

From thetaxadviser.com

At the end of every year, it seems, taxpayers wait anxiously for Congress to enact extensions of popular business tax breaks, and every year Congress waits to act until what seems like the last possible moment. Last year, the extenders were passed in December; the legislation extended more than 50 provisions retroactively, but, in most cases, those extensions expired again at the end of 2014. The year before, Congress acted even later, waiting until January 2014 to extend provisions for 2013.

Currently expired business tax breaks include Sec. 168 bonus first-year depreciation; increased limits for Sec. 179 expensing; and the Sec. 41 research and development credit.

At this point, it is still unclear when, or if, Congress will act to extend these expired provisions, but there are a number of steps business taxpayers can take to reduce taxes, even without those expired items.

Generally, to reduce 2015 taxes, businesses will want to accelerate deductions into this year and delay income until next year. Here are some suggestions to offer business clients to do that.

Deferring income to 2016

Cash-method businesses that want to defer income should consider delaying the sending of late-in-the-year invoices, so payment is not received until 2016.

Accrual-method businesses should, if possible, hold off on providing goods or services to customers until after Jan. 1.

Accrual-method taxpayers that are paid in advance may be able to take advantage of deferred payment rules under Rev. Procs. 2004-34 and 2011-18 in certain situations. When an accrual-method taxpayer receives payment before the taxpayer delivers the goods or performs the services generating that payment, the taxpayer can defer recognizing that revenue for tax purposes until the next tax year if the payments are reported as deferred revenue on the taxpayer’s financial statements or (if the taxpayer doesn’t generate financial statements) if earned in the later year. Note that, to adopt this treatment, the taxpayer must file Form 3115, Application for Change in Accounting Method.

Accelerating and maximizing deductions

Business taxpayers should be looking to maximize deductions and depreciation. The first step is to identify purchases and money that can be spent on deductible expenses, such as equipment repair, this year instead of waiting until 2016.

Cash-method businesses should consider paying bonuses before year end. Accrual-method taxpayers can also possibly deduct bonus payments made to unrelated employees within 2 1/2 months of year-end. However, for these bonus payments after year-end to be deductible in 2015, the liability to pay the bonus must be fixed and determinable by the end of the year.

Businesses should, as much as possible, try to make as many of their expenses deductible rather than capitalizable and should take advantage of the opportunity under Sec. 179 to currently deduct expenses for purchases of tangible property. This can be beneficial, even though the Sec. 179 limits are lower this year (currently the maximum amount that can be deducted under Sec. 179 is $25,000 and the expensing amount is reduced, dollar for dollar, when the amount of Sec. 179 property placed in service exceeds $200,000).

If a portion of an asset was replaced during the year (e.g. the roof of a building was replaced), a business should consider making a partial disposition election. Under the election, the replacement of the portion of the asset is treated as a partial disposition of the asset, allowing the business to recognize a loss on the disposition of that portion of the asset.

Absent the retroactive increase in the Sec. 179 deduction for the purchase of business property, businesses can still take advantage of some favorable provisions in the repair regulations.

First, businesses should try take advantage of the tangible property regulations’ de minimis safe harbor. Small businesses (without applicable financial statements) can take advantage of the annual election to deduct small purchases of $500 or less per invoice or per purchase. Businesses with applicable financial statements can deduct purchases of up to $5,000 each. 

Small business (those with average gross receipts of less than $10 million) can also take advantage of safe harbor for repairs, maintenance, or improvements to eligible buildings (buildings with an unadjusted basis of less than $1 million). Under the safe harbor, expenses for repairs, maintenance, or improvements to an eligible building are currently deductible if their cost does not exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.

For more on taking advantage of the Sec. 179 expensing and the tangible property regulations, see Sellner, “The Interaction Between Sec. 179 and the Repair Regs.” 45 The Tax Adviser 596 (August 2015).

To maximize depreciation, businesses should purchase supplies and equipment in 2015, but the timing of acquisitions is key. The new assets must be placed in service in 2015 to qualify for depreciation in 2015, and businesses should watch out for triggering the mid-quarter convention, which will reduce the amount of the 2015 depreciation deductions for assets purchased late in the year. The mid-quarter convention will apply if more than 40% of the year’s purchases are in the last three months of the year.

Business should also look to harvest losses, checking for the availability of deductions for business bad debts, casualty and theft losses, and losses on the sale of business assets.

S corporation shareholders who anticipate that the S corporation will pass through losses to them this year should ensure that they have sufficient basis to deduct the losses. If they don’t, they should consider making a loan to the S corp. to increase their bases.

Affordable Care Act benefits and burdens for small businesses

A small employer should consider whether it qualifies for the Sec. 45R credit to help pay for its employees’ health insurance premiums. An employer qualifies for a Sec. 45R credit as a “qualified small employer” if it has 25 or fewer FTEs whose average annual wages are less than $50,000. The credit is 50% (35% for not-for-profits) of the amount of the premiums, but there is a steep phaseout as average annual wages increase between $25,000 and $50,000 (with inflation-adjusted cutoffs of $25,800 and $51,600, respectively, for 2015) and/or average FTEs increase between 10 and 25.

Eligible employers can claim this credit only for two consecutive tax years by filing Form 8941, Credit for Small Employer Health Insurance Premiums, in the first tax year in which the employer offers one or more qualified health plans to its employees through an exchange.  

Another provision of the health care law that small businesses should be aware of is the Sec. 4980D penalty on certain employer payment plans, which the IRS abated for taxpayers that are not applicable large employers (i.e., employers that did not employ an average of 50 full-time employees during the preceding calendar year) until June 2015. Under Sec. 4980D, employer payment plans generally are considered to fail the market reform requirements of the health care law and are subject to a $100 per day excise tax per employee. The IRS has not yet abated the penalty for the rest of 2015 for non-ALE employers. This penalty can quickly add up to hurt a small employer, so any company not yet in compliance should act fast.  

Other business benefits

Businesses with U.S. manufacturing activities can take the Sec. 199 domestic production activities deduction. Under Sec. 199(b)(1), the amount of the domestic production activities deduction allowed for any tax year cannot exceed 50% of the taxpayer’s W-2 wages for the tax year that are allocable to domestic production gross receipts. W-2 wages are defined, for any person for that person’s tax year, as the sum of amounts described in Secs. 6051(a)(3) and (8) (the total wages subject to income tax withholding and deferred compensation) paid by that person for the employment of employees by that person during the calendar year ending during that tax year. Businesses should consider accelerating salaries or bonuses that would be attributable to domestic production gross receipts into the last quarter of 2015 to increase the amount of this deduction.

Keep an eye on Congress

Figuring out if and when Congress will get around to passing the 2015 tax extenders is a guessing game at this point. The Senate Finance Committee acted in July with a package of the usual temporary extenders, but the House of Representatives is not on board and wants to pass permanent provisions. Taxpayers should still pay attention so they can act in the unlikely event that something happens before the end of the year and take advantage of any provision that has been extended.

IRS Deadline for Those With Tax Extentions is October 15 - Last Minute Tips for Filers

Taxpayers whose tax-filing extension runs out on Oct. 15 are being urged to double check their returns for often-overlooked tax benefits and then file their returns electronically. It's also not too late to seek professional tax guidance from a CPA or Enrolled Agent.

About a quarter of the 13 million taxpayers who requested an automatic six-month extension this year have yet to file. Although Oct. 15 is the last day for most people, some still have more time, including members of the military and others serving in combat zone localities who typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

“If you still need to file, don’t forget that you can still file electronically through October 15,” said IRS Commissioner John Koskinen. “Many people may not realize they may be eligible to use Free File available on IRS.gov/freefile. Free File is free tax software that takes the guesswork out of return preparation. Even if you’re filing in the final days, filing electronically remains easy, safe and the most accurate way to file your taxes.”

Check Out Tax Benefits

Before filing, the IRS encourages taxpayers to take a moment to see if they qualify for these and other often-overlooked credits and deductions:

Benefits for low-and moderate-income workers and families, especially the Earned Income Tax Credit. The special EITC Assistant can help taxpayers see if they’re eligible.
Savers credit, claimed on Form 8880, for low-and moderate-income workers who contributed to a retirement plan, such as an IRA or 401(k).
American Opportunity Tax Credit, claimed on Form 8863, and other education tax benefits for parents and college students.

Health Care Tax Reporting

While most taxpayers will simply need to check a box on their tax return to indicate they had health coverage for all of 2014, there are also new lines on Forms 1040, 1040A and 1040EZ related to the health care law. Visit IRS.gov/aca for details on how the Affordable Care Act affects the 2014 return. This includes:

Reporting health insurance coverage.
Claiming an exemption from the coverage requirement.
Making an individual shared responsibility payment.
Claiming the premium tax credit.
Reconciling advance payments of the premium tax credit. Properly doing so can help maintain continued eligibility for premium assistance in 2016.
The Interactive Tax Assistant tool can also help determine if a taxpayer qualifies for an exemption, needs to make a payment or is eligible for the premium tax credit.

Taxpayers who intend to claim the Health Coverage Tax Credit for 2014 must first file an original 2014 tax return without claiming the HCTC, even if they have no other filing requirement . They can then file an amended return when the IRS issues further HCTC guidance. Visit irs.gov/hctc for updates.

E-file Now: It’s Fast, Easy and Often Free

The IRS urges taxpayers to choose the speed and convenience of electronic filing. Fast, accurate and secure, filing electronically is an ideal option for those rushing to meet the Oct. 15 deadline. The IRS verifies receipt of an e-filed return, and people who file electronically make fewer mistakes too. Of the nearly 144 million returns received by the IRS so far this year, about 86 percent or over 124 million have been e-filed.


Taxpayers who purchase their own software can also choose to e-file, and most paid tax preparers are now required to file their clients’ returns electronically.

Everyone can use Free File, either the brand-name software, offered by the IRS’s commercial partners to individuals and families with incomes of $60,000 or less, or online fillable forms, the electronic version of IRS paper forms available to taxpayers at all income levels.

Join the eight in 10 taxpayers who get their refunds faster by using direct deposit and e-file. Taxpayers can choose to have their refunds deposited into as many as three accounts. See Form 8888 for details.

2015 year-end tax planning — what’s new

FROM ACCOUNTINGTODAY.COM

With another year-end tax planning season now upon us, a survey of some of the new developments that have taken place over the past year is often useful. Assessing income and deductions currently realized in 2015 and forecasting for the remainder of the year and into 2016 has become an ingrained part of year-end planning, in which tax brackets are balanced, and a variety of adjusted gross income ceilings and floors between years are manipulated to a taxpayer’s best advantage. This column, however, takes a look at some of what’s new so far in 2015 in generating ideas that may have an impact on year-end planning.

LEGISLATION

At the top of the list on Congress’ tax agenda for the fall is passage of must-do legislation to renew approximately 50 tax incentives, known as extenders. Tax changes may also appear in a multi-year highway bill and/or as stand-alone legislation before year-end 2015. So far this year, however, no major changes impact 2015 year-end tax planning.

1. Tax extenders. Once again, passage of a “tax extenders” package may prove to be a cliffhanger. At stake are over 50 provisions that officially expired at the end of 2014. The hope is not only to retroactively reinstate them, but also to extend them through 2016. High on the list of extenders impacting individuals are the state and local sales tax deduction, the exclusion of discharge of qualified principal residence indebtedness, the mortgage insurance premium deduction, and the teachers’ classroom expense deduction. Business extenders include, among many others, extension of Section 179 expensing, the research credit, transit benefits parity, and the Work Opportunity Credit.

2. Trade Act. President Obama on June 29 signed the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (HR 2146) and the Trade Preferences Extension Act of 2015 (HR 1295). The trade bills touch on several tax provisions that carry year-end planning implications:

The Health Coverage Tax Credit under Code Sec. 35, used to help offset the cost of health insurance by workers whose jobs have been outsourced, has been renewed. The revived HCTC is made retroactive to Jan. 1, 2014, and available for months beginning before Jan. 1, 2020.

The Defending Public Safety Employees’ Retirement Act, included in HR 2146, provides certain federal public safety officers with an exemption from the 10 percent penalty on early distributions from a qualified retirement plan. The provision applies to distributions made after Dec. 31, 2015, so affected taxpayers should postpone taking advantage of the new law until 2016.

The major tax change brought about by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (a.k.a., the Highway Bill) involves revised due dates of certain returns and extensions. For the most part, however, they only start to impact taxpayers in 2017. Likewise, enhanced mortgage reporting and estate tax valuation connected to stepped-up basis have effective dates that removed them from 2015 year-end planning consideration.

SAME-SEX MARRIAGE

The Supreme Court’s 2015 Obergefell decision on same-sex marriage did little to change treatment on the federal tax level. Rev. Rul. 2013-17 had already determined that for federal tax purposes, the state of celebration would control whether a same-sex couple should file jointly and otherwise be treated as married. Nevertheless, a shake-out of strategies to take advantage of the changes brought about by the Supreme Court’s Windsor decision in 2013 continues to evolve.

Benefits have been one focal point. A few weeks after Obergefell, the Social Security Administration made a focused effort to encourage spouses, divorced spouses, and surviving spouses of a same-sex marriage to apply for benefits in light of the decision. The SSA also reported that it was working with the Department of Justice to analyze the decision and provide instructions for processing claims.

MORTGAGE INTEREST DEDUCTION

In a pro-taxpayer case brought by a same-sex unmarried couple but not necessarily confined in its application, the Ninth Circuit in Voss held that multiple owners of a single residence can claim home mortgage interest deduction in excess of the $1 million and $100,000 home equity indebtedness cap. In reversing the Tax Court, the appellate court said that the IRS’s interpretation of the ceiling was wrong and that the language that set the limits were not per residence, but rather per taxpayer (with a reduced limit imposed on married taxpayers filing separately).

This case, which in effect can double the ceiling to $2 million/$200,000 for two owners, might also work in connection with vacation property — say, for example, in a situation in which several members of the same extended family might purchase and jointly mortgage a family compound-like setup. Since only a single appellate circuit has signed on to this expansion of the mortgage interest deduction so far, however, taxpayers should move cautiously and expect continued IRS resistance.

RETIREMENT PLANNING

Year-end strategies include the usual consideration of Roth IRA conversions, increasing contributions to 401(k) plans, and computing any required minimum distribution requirement, among others. Gone, however, is the free-wheeling option of withdrawing from multiple IRAs to consolidate or otherwise redistribute balances. Following Bobrow, TC Memo. 2014-21, the IRS ended a grace period and announced that, effective for rollover distributions received on or after Jan. 1, 2015, a taxpayer would be limited to one 60-day rollover per year for all IRA accounts, rather than one 60-day rollover per year for each IRA account. The penalty for ignoring this rule may be immediate recognition of the entire account balance in income, as well as imposition of a 10 percent early withdrawal penalty. Unlimited trustee-to-trustee transfers, however, are still allowed and therefore offer a workaround.

ABLE ACCOUNTS

Although first authorized over 18 months ago by the Tax Increase Prevention Act of 2014, A Better Life Experience, or ABLE, accounts remain unavailable. To help jumpstart the process, the IRS in Notice 2015-18 assured states that may soon enact enabling legislation, before guidance is issued, that ABLE accounts may still qualify under Code Sec. 529A even though the legislation or the account documents do not fully comply with subsequent guidance. Later in 2015, the IRS released proposed reliance regs (IR-2015-91, NPRM REG-102837-15)), that provided additional details on the establishment, funding, distribution and reporting of ABLE Accounts.

Accounts may be set up for qualified individuals with disabilities for tax years beginning after Dec. 31, 2014. Contributions to an ABLE account are limited to the annual gift tax exclusion ($14,000 in 2015), which give ABLE contributions a year-end planning dimension. A major drawback to aggressive funding in many cases, however, is that amounts left over in an account after the beneficiary dies must be transferred to the state.

INVESTMENT PLANNING

Adjusting capital gains and losses, and dividend income, has always been a year-end staple. With the erratic swings in the stock markets lately, those adjustments may prove even more challenging. Simply because markets are down, however, does not mean that the taxpayer should assume that there are losses. Cost basis may be low due to prior-year holdings as the result of the long-term bull market.

2015 is the third year in which the net investment income tax of 3.8 percent applies. Taxpayers are settling into the routine of computing NII in connection with timing capital gains and other NII-captured transactions and paying estimated tax on them. IRS statistics early in 2015 confirmed that recent run-ups in the financial markets, combined with the fact that the NII thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.

REPAIR-CAPITALIZATION RULES

Year-end repairs and other expenses are generally more cost-effective if allowed to be written off immediately, rather than capitalized and depreciated. An increase in the de minimis safe harbor threshold amount under the final “repair regs” for taxpayers without an applicable financial statement is needed for small businesses, the American Institute of CPAs told the IRS in early 2015. It urged the IRS to significantly boost the threshold amount from $500 to as much as $2,500.

Currently, a de minimis safe harbor allows taxpayers to deduct certain items costing $5,000 or less (per item or invoice) and that are deductible in accordance with the company’s AFS. IRS regs also continue to provide a $500 de minimis safe harbor threshold for taxpayers without an AFS.

In July, the IRS released a much-anticipated draft version of Form 3115, Application for Change in Accounting Method. Slated for release in final form by December, the new forms will be used to process many more method changes than were required back in 2009 when the current form was issued. While the draft generally follows the basic format of the current form, it makes some significant changes. New instructions are expected to do most of the heavy lifting on navigating the growing complexity of the rules.

At a recent webinar, an IRS representative indicated that taxpayers will be permitted to continue using the current version of Form 3115 (revised December 2009) to file method changes for the 2014 tax year under the repair regs even after the final version is released. This will generally benefit filers who would not need to re-prepare forms on which work has begun, or otherwise change procedures in the preparation of the form at year’s end.

SEC. 199 DEDUCTION ACTIVITIES

A new directive from the IRS Large Business and International Division provided guidance to examiners on whether certain activities qualify for the Sec. 199 domestic production activities deduction (LB&I 04-0315-001). To be eligible for the Sec. 199 deduction, a taxpayer must determine, among other requirements, if it had manufactured, produced, grown or extracted qualified property in whole or in significant part within the United States, the IRS reminded examiners.

The IRS also issued final, temporary and proposed regulations on the allocation of Sec. 199 wages in short tax years. Proposed regulations also clarify how to determine domestic production gross receipts, among other fine points. Those involved with the Sec. 199 deduction should review these regulations with respect to timing receipts and expenditures as a necessary adjunct to year-end planning.

INSTALLMENT METHOD

The installment method of reporting gain has been a tried-and-true way to defer gain on a sale into subsequent tax years. Not all income from installment payments may be deferred pro-rata, however. In Mingo, CA-5, Dec. 9, 2014, for example, the Fifth Circuit denied installment method for gain from sale of partnership interest attributable to unrealized receivables. In that case, the Fifth Circuit Court of Appeals found that married taxpayers were not entitled to use the installment method to report income from unrealized receivables the wife received from the sale of her partnership interest in a consulting business. Since the proceeds did not arise from the sale of property, their installment method of accounting did not clearly reflect income.

Existing installment sale regulations (Reg. Sec. 1.453-9(c)(2)) provide the rule that gain is not recognized on a disposition of an installment obligation if another non-recognition provision applies. Subsequently, in Rev. Rul. 73-423, the IRS provided an exception to this non-recognition rule (thus requiring recognition of gain on the disposition) where the transferor of the obligation receives stock in satisfaction of the obligation. Proposed regs (NPRM REG-109187-11) now incorporate the holding of the revenue ruling and also apply it to the receipt of a partnership interest.

PARTNERS’ CHANGING INTERESTS

The IRS issued final regs (TD 9728) during this past summer under Sec. 706(d) to address how to allocate partnership items among partners whose interests in the partnership change during its tax year. Among its changes, the final regulations set forth an expanded scope of the varying interest rule, which requires that partners’ distributive shares of partnership tax items for a tax year must take into account the varying interests of the partners in the partnership during the tax year. This adds a certain degree of flexibility in determining a partner’s distributive share when interests change at year end or otherwise.

ROUTINE SERVICE CONTRACTS

Rev. Proc. 2015-39 has provided a safe harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts. The IRS also indicated that additional safe harbors may be developed. This new safe harbor should prove useful immediately for year-end strategies by accrual-basis taxpayers currently negotiating contracts for regular services that extend into 2016. Done right to fit under the definition of ratable service contracts, a full deduction in the current 2015 tax year may be taken for certain 2015 payments, even though services may not be performed until 2016.

CONCLUSION

Each year, year-end planning takes some new twists and turns, not only because client situations change from year to year, but also because the tax law is constantly evolving. 2015 is proving no exception to changes in the tax law that may change or enhance year-end strategies. And with 2015 not yet over, additional developments, including but certainly not limited to tax legislation, are sure to further challenge existing tax strategies as we head ever closer to Jan. 1, 2016. 

Year-End Tax-Planning Considerations for Those About to Get Married

FROM http://www.accountingtoday.com/

As if the process of getting married isn’t complex and difficult enough, prospective spouses also need to take income tax considerations into account before tying the knot.

That’s particularly true for those who plan to marry late this year or early next year. From the federal income tax standpoint, those marrying next year may come out ahead by deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year.

The timing issue—whether to marry this year or the next—may be particularly relevant for same-sex couples in light of the recent decisions by the Supreme Court. In Obergefell v. Hodges, the Supreme Court held in June that same-sex couples may now exercise the fundamental right to marry in all states. Previously, in the 2013 decision U.S. v. Windsor, et al, the Supreme Court struck down section 3 of the Defense of Marriage Act, which had required same-sex spouses to be treated as unmarried for purposes of federal law. The IRS subsequently issued guidance on this decision in which it determined that same-sex couples legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes their marriage.

Background: The amount of income subject to the two lower tax brackets (10 percent and 15 percent) for married taxpayers filing jointly is exactly twice as large as the amount of such income for single taxpayers. However, the tax brackets above 15 percent cover a larger total amount of income for two single taxpayers than for two taxpayers who are married.

For example, in 2015, two unmarried taxpayers can each have $90,750 of taxable income before they hit the 28 percent bracket. On the other hand, if they are married, their combined taxable income over $151,200 will be taxed at a rate starting at 28 percent. Also, on a joint return, the 33 percent rate begins at $230,450, the 35 percent rate starts at $411,500, and the 39.6 percent rate starts at $464,850.

On the other hand, two unmarried taxpayers with substantially equal amounts of income can have as much as $378,600 ($189,300 × 2) of taxable income before being in the 33 percent bracket, $823,000 ($411,500 × 2) before being in the 35 percent bracket, and $826,400 ($413,200 × 2) before being in the 39.6 percent bracket.

Thus, there is a marriage penalty when, for example, married taxpayers’ combined income will cause part of their income to be taxed at a rate above 25 percent, when none of their income would be taxed at a rate above 25 percent if they filed as single individuals.

A taxpayer’s marital status for the entire year is determined as of Dec. 31. A taxpayer who gets married (or divorced) on that date is treated as if he were married (or single) all year long.

Marriage-penalty implications for year-end planning: Those eager to tie the knot as soon as possible should keep in mind that deferring the marriage until next year could save substantial tax dollars. And, where two unmarried taxpayers with substantially equal amounts of taxable income have solidified plans to marry next year, it may pay to accelerate income into this year rather than attempt to defer it until next year.

Illustration 1: John and Jess are planning to get married. Jess expects to have $300,000 of taxable income in 2015, and John expects to have $250,000. Their combined taxable income for 2015 will be $550,000. If they get married before 2016, and file a joint return for 2015, they will owe income taxes for 2015 of $163,715.90. If they delay their marriage until 2016, then for 2015, Jess will owe taxes of $82,606.25, and John will owe $66,106.25, for a combined tax of $148,712.50. This will be $15,003.40 less than they would owe if they married in 2015 and filed a joint return for 2015.

If John and Jess married in 2015 and filed separate income tax returns for 2015, John would owe income taxes of $71,957.95 on taxable income of $250,000, and Jess would owe income taxes of $91,757.95 on taxable income of $300,000. The combined amount they would owe would be $163,715.90, the same amount they would owe if they filed a joint return for 2015.

Marriage bonus implications for year-end planning: If only one of the prospective spouses has substantial income, marriage and the filing of a joint return will usually save taxes, thus resulting in a marriage bonus. In such a case, it will probably be better to defer income until next year if they will be married next year, or, if they are in the planning stage, to accelerate the marriage into this year if feasible.

Illustration 2: Same facts as in Illustration 1, except John expects to have taxable income of $25,000 in 2015, and Jess expects to have taxable income of $525,000. If they get married before 2016, and file a joint return for 2015, they will owe income taxes for 2015 of $163,715.90. If they delay their marriage until 2016, then John will owe income taxes of $3,288.75 for 2015, and Jess will owe income taxes of $164,269.05. Their combined income taxes will be $167,577.80 in 2015 if they file as single taxpayers, or $3,841.90 more than they would pay if they filed a joint return for 2015.

Depending on the taxpayers’ income, marriage and the filing of a joint return may not only result in a marriage bonus because of the tax-rate structure, but also produce tax savings in the form of bigger deductions based on adjusted gross income, or smaller AGI-based tax hikes. For example, for 2015:

• The AGI phaseout for making deductible contributions to traditional IRAs by taxpayers who are active participants in an employer-sponsored retirement plan begins at $98,000 of modified AGI (MAGI) for joint return filers and the deduction is phased out completely at $118,000 of MAGI. For single taxpayers, the phaseout begins at $61,000 of MAGI and is phased out completely at $71,000 of MAGI. And for a married taxpayer who is not an active plan participant but whose spouse is such a participant, the otherwise allowable deductible contribution phases out ratably for MAGI between $183,000 and $193,000.

• Individuals may take an above-the-line deduction for up to $2,500 of interest on qualified education loans, but the amount otherwise deductible is reduced ratably at modified AGI between $130,000 and $160,000 on joint returns, and between $65,000 and $80,000 on other returns.

• The 3.8 percent investment surtax applies to the lesser of (1) net investment income or (2) the excess of MAGI over the threshold amount of $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for other taxpayers.

• The additional 0.9 percent Medicare (hospital insurance) tax applies to individuals receiving wages with respect to employment in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for other taxpayers.

Besides the above considerations, couples thinking of marrying should consider there are various tax rules that apply differently to related parties, and that, when one marries, his spouse becomes a related party. For example, there is a rule that doesn’t allow someone to recognize a loss on a sale to a related party. Using that example, a couple may want to consider having an intra-couple sale occur before the marriage takes place.