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To Our Clients and Friends:
Despite recent tax increases, the current federal income tax environment remains relatively favorable by historical standards. This letter presents some tax planning ideas to consider this fall while you have time to think. Some of the ideas may apply to you, some to family members, and others to your business. |
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2015 Income Tax Rates
The ordinary federal income tax rates for 2015 will be the same as last year: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
For 2015, the top 39.6% rate affects taxpayers with taxable income above $413,200 for singles, $464,850 for married joint-filing couples, $439,000 for heads of households, and $232,425 for married individuals who file separate returns.
Higher-income individuals may also be impacted by the 0.9% Medicare tax and the 3.8% Net Investment Income Tax (NIIT), which van both result in a higher-than-advertised marginal federal income tax rate for 2015. Finally, you may also need to consider whether you are exposed to Alternative Minimum Tax (AMT), which we can certainly help you determine.
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Time Investment Gains and Losses
As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them).
For most taxpayers, the federal income tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling in order to qualify for the lower long-term gain tax rate.
Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end may be a good idea as well. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less.
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Take Advantage of 0% Rate on Investment Income
For 2015 the federal income tax rate on long-term capital gains and qualified dividends is 0%, when those gains and dividends fall within the 10% or 15% federal income tax rate brackets. (If your taxable income, including long-term capital gains and qualified dividends, does not exceed $74,900 for married joint-filing couples or $37,450 for singles).
While your income may be too high, you may have children, grandchildren, or other loved ones who will be in the bottom two brackets. If so, consider giving them some appreciated stock or mutual fund shares that they can then sell and pay 0% tax on the resulting long-term gains.
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Sell Loser Shares and Give Away the Resulting Cash; Give Away Winner Shares
You may want to make gifts to favorite relatives and/or charities in conjunction with an overall revamping of your holdings of stocks and equity mutual fund shares held in taxable brokerage firm accounts. To get the best tax results from your generosity, do not give away shares that are currently worth less than you paid for them. Instead, sell the shares, and take advantage of the resulting tax-saving capital losses. Then, give the cash sales proceeds to the relative or charity.
On the other hand, do give away shares that are currently worth more than you paid for them. Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS. Most likely, your relative will pay lower tax rates than you would pay if you sold the shares.
Read More about how to get the best tax results from your generosity.
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Convert Traditional IRA into Roth IRA
A Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth IRA. While the tax hit from converting is unwelcome, it may be a relatively small price to pay for future tax savings. After the conversion, all the income and gains that accumulate in your Roth IRA, and all withdrawals, will be totally free of any federal income taxes-assuming you meet the rules for tax-free withdrawals. In contrast, future withdrawals from a traditional IRA could be hit with tax rates that may be higher than today's rates
Read More about considerations before converting.
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Plan to Avoid or Minimize the 3.8% Net Investment Income Tax
The net investment income tax, or NIIT, is a 3.8% surtax on investment income earned by higher-income individuals. It first took effect in 2013.
NIIT Basics. The NIIT can affect higher-income individuals who have investment income. While the NIIT mainly hits folks who consistently have high income, it can also strike anyone who has a big one-time shot of income or gain this year or any other year. For example, if you sell some company stock for a big gain, get a big bonus, or even sell a home for a big profit, you could be a victim.
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Consider Selling Rather Than Trading-in Vehicles Used in Business
Although a vehicle's value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it's time to replace a vehicle used in your business, it's not unusual for its tax basis to be higher than its value.
Selling the vehicle (and taking the deductible loss) may be more beneficial from a tax perspective than accepting the trade-in value.
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Retirement Plans
If your business doesn't offer a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions.
Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings.
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Employing Your Children
If you are self-employed, you might want to consider employing your child to work in the business. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction.
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Expected Extensions of Business Breaks
Several very favorable business tax provisions may dictate taking action between now and year-end. As this was written, these breaks had expired. However, Congress will likely extend them through this year. That could happen relatively late in the year, and you may have to move quickly to take advantage.
Larger Section IRC 179 Deduction. For tax years beginning in 2015, the maximum Section 179 deduction is currently only $25,000. However, Congress will likely increase the maximum allowance for tax years beginning in 2015 to $500,000.
Section 179 Deduction for Real Estate Expenditures
Real property improvement costs are generally ineligible for the the Section 179 Deduction privilege. However, a temporary exception applied to tax years beginning in 2010-2014. This exception expired but we expect it to be extended to cover qualifying real estate expenditures placed in service in tax years beginning in 2015. If this happens, your business could immediately deduct up to $250,000 or qualified costs for restaurant buildings and improvements to interiors of retail and leased nonresidential buildings.
50% First-year Bonus Depreciation Your business can also claim first-year bonus depreciation equal to 50% of the cost of most new equipment and software placed in service by December 31 of this year - assuming this break is extended. We expect this to happen but it could be late in the year. If so, be prepared to act quickly in order to take advantage.
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Don't Overlook Estate Planning
For 2015, the unified Federal gift and estate tax exemption is a historically generous $5.43 million, and the federal estate tax rate is a historically reasonable 40%. (The State of WA's estate tax exemption is currently $2,054,000.)
Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Additionally, it's a good time to review beneficiary designations on life insurance and retirement accounts.
Read More
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Conclusion
We wanted you to have the opportunity to start thinking about income tax planning moves as we move forward through the rest of the year. Please contact us if you want more details, or if you would like to schedule a tax planning strategy session. We can also meet with you to estimate your 2015 income tax liability, if you have any concerns relative to how this year's liability is shaping up for you.
Best regards,
Mike, Katie, Sheri, Chrissy & Beccie
Wittenberg CPA, PS
360-426-0230
www.WittenbergCPA.com
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