Hot-off-the-press year-end tax planning tips
With the busyness of the holiday season, who has time for tax planning? However, taking a few simple steps at year-end could result in some significant tax savings.
Protecting Americans from Tax Hikes (PATH) Act of 2015
Well, we waited all year (again), but Congress and the President finally passed a tax incentive extender bill in mid-December. This bill makes several tax incentives retroactively extended and others were actually made permanent.
Section 179 expensing, the provision allowing for an immediate write-off of up to $500,000 in qualifying capital expenditures, has been made permanent, to be indexed for inflation each year going forward.
Bonus depreciation has also been extended. The bill extends the 50 percent bonus depreciation for the purchase of new capital assets through 2017 and includes provisions for a 40 percent write-off in 2018 and 30 percent in 2019.
The extension of both of these provisions will finally give some flexibility to taxpayers to plan capital purchases out over multiple years.
Research Tax Credit
The research credit has been made permanent by the extender bill. This credit is claimed for qualified research expenditures. Companies with significant expenditures for research and development should consider reaching out to a specialist to determine the potential tax savings.
Tangible Property Regulations
There were significant changes to the Tangible Property Regulations in 2014. In 2015 and beyond it will be critical for business owners to review their policies and procedures to ensure compliance with the regulations.
One significant change to the regulations is the increase in the de minimis safe harbor limit for taxpayers without audited financial statements. This allows taxpayers to deduct the cost of items below this threshold when purchased. The original threshold was set at $500 per item, but has been raised to $2,500 effective January 1, 2016. The IRS has indicated that they will allow taxpayers to use this increased limit in 2015 as well. Taxpayers wishing to take advantage of this new incentive should update their written capitalization policy.
Often we practice the mantra “hold on to your depreciated investments and the market will turn around eventually.” However, the end of the year is a great time to consider getting rid of dead weight. In a tax year where an individual is projecting large capital gains from the sale of investments, it can be very advantageous to harvest capital losses by selling off bad or slow investments. These losses can offset your gains and result in a direct tax savings. It is also advantageous to avoid being forced to harvest those losses in future years, when the capital gain is no longer available to be offset.
Prepayment of State Taxes
One easy tax planning strategy individual taxpayers can utilize is to prepay the fourth quarter estimated payment before year-end. Through the use of taxable income projections it can be determined if the taxpayer will be subject to the Alternative Minimum Tax (AMT) in the current tax year. If the taxpayer is projected to be outside the AMT thresholds, it may be beneficial to prepay the fourth quarter state estimated payment by the end of the current tax year. This will result in additional itemized deductions and could result in a current-year tax savings.
Charitable Donation Planning
A donation to a qualified charity can support a cause that a taxpayer is passionate about and also generate a tax deduction. If planned properly, a charitable lead annuity trust (CLAT) can offer a taxpayer a current charitable deduction and be a great estate planning tool. A CLAT can offer an optimum deduction and investment return in a high-tax-rate and low-interest-rate environment.
A CLAT offers the person setting up a trust a current-year deduction that will paid to the designated charity over a determined period of time. If there is any of the initial investment in the CLAT remaining as a result of good investment planning that enabled the tax-free gains to pay the charity, the amount reverts to the designated heir or individual.
Saving for Retirement after Retirement
Many individuals continue to have an amount of earned income after they retire from their original profession after turning 59 ½. Save some tax on those earnings by contributing up to $6,500 to a traditional IRA. Since you planned so well for retirement, you were just going to have that extra money sit in the bank anyway. Why pay taxes on it for that?
Your business is very CAPTIVE-ating
If your business has some risks that you would like to insure against but think you can manage that risk over time, consider joining a group captive. The payment of the insurance premiums is fully deductible in the year of payment. Any of these payments that are not used to satisfy claims will come back to you or your designated beneficiary as dividends. Those dividends are taxed at the preferred tax rate of 20 percent. That can be a tax savings of approximately 20 percent if you are in the highest tax bracket and not subject to net investment income tax.
Converting a Traditional IRA to a Roth IRA
In a lower-income year, a conversion from a Traditional IRA to a Roth IRA may result in favorable tax situations for years to come. Upon conversion, the taxpayer will have to include the rollover amount in taxable income. If the taxpayer is traditionally a high-income-tax-rate taxpayer but is having a lower-income year and currently taxed in a lower bracket, the taxpayer would enjoy the benefits of lower tax as compared to future higher-tax-bracket years when distributions would be received. The Roth IRA also does not have a required minimum distribution age like the Traditional IRA. So, if the individual does not need the money or would like to continue to hold the investments in the Roth IRA after age 70 ½, the individual can do so.