Category: Individual Tax Planning
Posted: December 2015
There is much uncertainty for individual and business taxpayers, since popular tax credits and deductions for both groups have not been extended beyond their December 31, 2014 expiration dates. However, there are some traditional planning strategies that can be used to minimize your tax bill come April 15, 2016.
Moving taxable income between years
If you think you will be in the same or a higher tax bracket in 2016, you might consider increasing your taxable income in 2015 to take advantage of the lower tax bracket. Where possible, accelerate income into 2015, and defer deductions until 2016. If you expect to be in a lower tax bracket in 2016, you would do the opposite: defer income to next year, and accelerate deductions into 2015. This strategy works well for income or expenses you can control, such as self-employed income, real estate taxes, state estimated tax payments, charitable contributions, and medical expenses. Do you know that if you charge contributions and medical expenses on your charge card in 2015, they are deductible on your 2015 tax return, regardless of when they are paid?
As with any strategy, not every idea works for every taxpayer. There is alternative minimum tax, phaseouts for certain credits, and net investment income tax to consider.
Use of residential energy tax credits
The most commonly used energy credits for windows and doors have expired. However, “residential energy efficient property” credits are available through the end of 2016 for equipment such as geothermal heat pumps, solar water heaters, solar panels, residential wind turbines and fuel cells. The first three pieces of equipment can be installed in both principal and second homes, but not rentals. Fuel cell property qualifies only when it is installed on your primary residence.
Be sure to check out the manufacturer’s tax credit certification statement, as not all energy efficient improvements will qualify for the credit.
Managing capital gains and losses
Keep in mind that capital gain rates are lower than the regular tax rates. If you are in the 10% or 15% tax brackets, the Federal tax rate on long-term capital gains and qualified dividends is zero percent! For taxpayers in the 25%, 28%, 33% or 35% brackets, the rate is 15%. The 20% rate on capital gains applies to taxpayers in the highest bracket of 39.6%. You may want to consider your overall tax rate on taxable income without capital gains to see if this is a year you might qualify for no tax on your capital gains. As always, capital gain income can be offset by capital losses, so a conversation with your investment counselor may be in order. Remember that capital losses in excess of capital gains are limited to a deduction of $3,000 per year.
Utilize employer-provided tax saving opportunities
Employees may be offered some choices to save taxes through programs provided by their employers. One such program is health flexible spending accounts (health FSA). A pre-tax contribution of $2,550 is permitted for 2015, which could save tax of $383 in the 15% tax bracket. This is a “use it or lose it” type of account, so if you participate in a health FSA plan, be sure to incur reimbursable expenses before December 31.
Another employer program is a dependent care FSA. The maximum contribution to such a plan is $5,000 for married filing jointly taxpayers. There is also a credit for childcare expenses, but it is phased out for high-income taxpayers. This type of account almost always will provide greater tax savings for such taxpayers. Again, the “use it or lose it” rule applies, so be sure to review your 2015 expenditures. This is also a good time to estimate expenditures for 2016 for amounts to be set aside.
A third type of plan is a health savings account (HSA). These plans can only be established by persons who are covered by a high deductible health plan ($2,600 deductible for family coverage in 2015), which has a limit for annual out-of-pocket expenses ($12,900 for family coverage in 2015). Maximum contributions to an HSA are $6,650 for an individual with family coverage. These plans accumulate earnings tax free, and may be carried over from year to year.
Some employers sponsor contributory retirement plans such as 401(k) plans. Maximize your contribution, especially if your employer provides a matching contribution. The permitted amount for employee contributions is $18,000 for 2015, with a catch-up contribution of $6,000 if you are over age 50. Self-employed persons, or employees without an employer-sponsored retirement plan, can make a traditional IRA contribution of $5,500.
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