More for Christmas, Less for the IRS – Saving Money with Year End Tax Planning

Executive Summary

Most year-end income tax planning strategies fall into two broad categories: first, maximizing available credits and deductions, and second, accelerating and postponing income and deductions. The heart of intelligent income tax planning is taking advantage of credits and deductions to which you are entitled. This can result in significant annual tax savings, but requires attention to changes in the law and changes in your own personal circumstances. For certain individuals, income tax planning also involves strategically timing income and deductions to take advantage of variations in tax bracket from one year to the next.

The first part of this memorandum discusses some changes in the income tax landscape for 2015. The second part provides more details on credits and deductions – for example a mortgage interest deduction for certain veterans, credits for the elderly or disabled, or credits for caring for a loved one – and how to obtain them. We next touch on certain life changes that can trigger eligibility. Finally, the third part of this memo discusses strategies that are commonly used to control the timing of taxable income and deductions such as delaying receipt of a bonus from work or prepaying deductible expenses with a credit card.

We have attached two exhibits. Exhibit A consists of a table showing a comparison of certain tax code provisions in 2015 and 2016 and Exhibit B contains several tables detailing the 2016 income and capital gains tax brackets for married individuals, heads of households, single filers and trusts and estates.

Changes to the Tax Landscape

The biggest potential change in the tax landscape in 2015 is still up in the air: Congress is yet to extend fifty-two tax provisions that significantly impact taxpayers (many of which involve the credits and deductions addressed below). Though it is likely that most or all of these will be extended, precisely what happens with them remains to be seen.

One change that is certain is the increased Affordable Care Act tax penalty on Americans lacking health insurance. In 2015, those penalties are increased to the greater of $325 for each adult and $162.50 for each child (not to exceed $975) or 2 percent of household income, minus the amount of your tax-filing threshold, about $10,150 for an individual. An individual making $100,000 a year who lacks essential minimum coverage will pay a tax penalty of $1,797.

Other changes to the tax code that will affect many Americans are annual inflation increases. This year sees a $500 increase in the limit on employee contributions to 401(k) plans, 403b accounts, most 457 retirement plans allows employees to contribute up to $18,000. The “catch-up” allowance for those over 50 has also been increased by the same amount, allowing for an additional $6,000 in contributions.

The tax deduction for making a traditional IRA contribution is now phased out at a higher level. For individuals who have a workplace retirement plan and a modified adjusted gross income of more than $61,000 but less than $71,000. For couples, the phase out is between $98,000 and $118,000.

The income limits for contributing to a Roth IRA will increase by $2,000 in 2015. The new limits are $116,000 or more but less than $131,000 for individuals, and $183,000 or more but less than $193,000 for married couples. If you have both a traditional and Roth IRA, you can only contribute a maximum of $5,500 (or $6,500 if you’re 50 or older) across both accounts each year.

Starting in 2015, except for direct “trustee to trustee” rollovers, you can only make one single rollover from an IRA in a 12-month period. The new IRS rule targets the practice of withdrawing funds and then re-depositing them in a new account as a form of short-term, interest-free loan.

Finally, a quick word on the estate tax. The Federal estate tax exemption for 2015 is $5,430,000 for individuals or $10,860,000 for a married couple. In 2016, these rates will increase to $5,450,000 and $10,900,000 respectively. The annual gift exclusion remains at $14,000, and individuals who use annual gifting as part of their estate tax strategy should remember to make those gifts before the end of the year.

Credits and Deductions

The best way to minimize income tax liability is to be aware of all tax credits and deductions for which you qualify. If you file your own taxes, this entails understanding credits and deductions to which you are entitled, but even if you work with a tax professional, it is important that you be sure to fully inform them of changes in your life that may help you qualify.

The following are among the life events that often significantly impact your income tax liability:

• Marriage, divorce or death of a spouse.
• Birth of a child
• Child aging out of child credit
• Casualty losses
• Medical procedures
• Moving
• Increased College or Tuition Expenses
• Employment changes
• Retirement
• Bankruptcy
• Inheritance
• Business Success of Failure

If you have experienced any of these during the last year, be sure to investigate how they may affect your eligibility for credits or deductions and, therefore, your overall income tax liability.

The major deductions include the following:

• Business Use of Car – you may deduct the entire cost of operation if you use it only for work (subject to limits), or only the cost of its business use if you use the car for both business and personal purposes.
• Business Use of Home – you can take a deduction for the value of portions of your house used exclusively and regularly as principal place of business for your trade or business, as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business, as business storage or as rental space.
• Home Related Expenses – deductible expenses for business use of your home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs.
• Business Travel Expenses – the ordinary and necessary expenses of traveling away from home for your business, profession or job.
• Bad Business Debt – you may be entitled to a deduction if there was an intention at the time of the transaction to make a loan and not a gift AND you have no reasonable expectation that the nonbusiness bad debt will be repaid.
• Depreciation – for certain capital expenditures, machinery, equipment, buildings, vehicles, and furniture, you can deduct a part of the cost every year until you fully recover its cost.
• Taxes – you may be able to deduct certain non-business taxes if you itemize deductions using Form 1040: state, local and foreign income or real estate taxes, as well as state and local personal property and general sales taxes.
• Medical Expenses – you can deduct the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI), or if either you or your spouse were born before January 2, 1950, you can deduct the amount that is more than 5% of your AGI. This extends to the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. This may include medical expenses you pay for yourself, your spouse or your dependent.
  • Don’t forget mileage: The standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is 23.5 cents per mile.
• Student Loan Interest – you can reduce your income subject to tax by up to $2,500 by deducting the cost of interest paid on your student loan. The student must be you, your spouse, or your dependent and enrolled at least half-time in a degree program. The loan must have been taken out solely to pay qualified education expenses and cannot be from a related person. This deduction phases out at $160,000 if married filing a joint return or $80,000 if single, head of household, or qualifying widow(er).
• Educational Savings Plans – if you participate in a qualified tuition program (QTP) or “529 plan,” earnings from the plan are generally tax-free if the total distribution is less than or equal to adjusted qualified education expenses.

Tax credits can further chip away at the total tax owed:

• Earned Income Tax Credit – you may qualify for this credit if you work, have a Social Security number and have an income below specific thresholds. EITC is a refundable tax credit, which means you may get money back even if you have no tax withheld. For tax year 2015, both earned income and adjusted gross income (AGI) must each be less than:
  • $14,590 ($20,020 married filing jointly) with no qualifying children;
  • $38,511 ($43,941 married filing jointly) with one qualifying child;
  • $43,756 ($49,186 married filing jointly) with two qualifying children;
  • $46,997 ($52,427 married filing jointly) with three or more qualifying children
• Child Tax Credit – you may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you and your spouse filing a joint return to work or actively look for work.
  • The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals.
  • The amount of your credit is a between 20 and 35 percent of your allowable expenses, depending on the amount of your adjusted gross income.
• Adoption Credit – if you adopted a child, you may be eligible for a credit of up to $13,400 per child for qualified adoption expenses paid and an exclusion for employer-provided adoption assistance.
• Education Credits – if you, your spouse, a student you claim as a dependent on your return, or a third party paid qualified tuition expenses in 2015, you may be eligible for either the American Opportunity Tax Credit or the Lifetime Learning Credit.
  • Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution, including student activity fees you are required to pay to enroll or attend.
  • The American Opportunity Tax Credit is a credit for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
    • To claim the full credit, your modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly). You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses, including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return and is not refundable.
    • To claim the full credit, your modified adjusted gross income must be $55,000 or less ($110,000 or less for married filing jointly). If your modified adjusted gross income is over $55,000 but less than $65,000 (over $110,000 but less than $130,000 for married filing jointly), you receive a reduced amount of the credit. If your MAGI is over $65,000 ($130,000 for joint filers), you cannot claim the credit.
  • Miscellaneous Educational Deductions – you may also be able take advantage of several other educational incentives:
    • You can make early distributions from any type of individual retirement arrangement (IRA) for education costs without paying the 10% additional tax on early distributions;
    • Savings bonds can be cashed in for education costs without having to pay tax on the interest;
    • Educational benefits from your employer are tax free; and
    • You can claim a business deduction for work-related education.
  • Credit for the Elderly or Disabled – if you are aged 65 or older or retired on permanent and total disability and received taxable disability income for the tax year and meet certain income limits, you may qualify for a credit of between $3,750 and $7,500.
  • Mortgage Interest Credit – in North Carolina, first time home buyers and veterans who meet certain income requirements may qualify for a Mortgage Credit Certificate from your local or state government that allows you to claim a tax credit for a portion of your annual mortgage interest expense.
    • You can claim 30% of the interest you pay on your mortgage if you purchase an existing home or 50% of the interest for a new home (never occupied) – up to $2,000 for every year you live in your home – as a tax credit on your federal income taxes.
    • Your deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status).
    • You can also generally deduct interest on home equity debt of up to $100,000 ($50,000 if you’re married and file separately) regardless of how you use the loan proceeds.
  • Residential Energy Efficient Property Credit – if you buy certain home energy efficiency equipment, including solar hot water heaters, solar electric equipment and wind turbines, you can qualify for a credit of 30 percent of the expenditures made by a taxpayer during the taxable year for qualified equipment. There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
  • Nonbusiness Energy Property Credit – if you make certain qualifying energy efficient improvements to you home, such as insulation, water heaters or air systems, you may qualify for a credit of up to $500, only $200 of which can be for windows.
  • Electric Vehicle Credits – purchases of a qualifying electric vehicle can result in a credit of as much as $7,500 against your income tax. To qualify, you must purchase a new vehicle made by a manufacturer that complies with the Clean Air Act and weighs 14,000 pounds or less.

The deductions and credits listed above are among the most significant for the average taxpayer, but there are many others that may apply to specific circumstances.

Timing Your Income and Deductions

Aside from simply taking credits and deductions, a significant aspect of year-end tax planning, and one that many people fail adequately to utilize, is taking measures to shift income or deductions from one year to another. This is especially important for taxpayers who know they will be in different income brackets in different years; by shifting income into years in which you are in a lower bracket or shifting deductions into a year in which you are in a higher bracket, you can significantly reduce your overall, combined taxable income for those years. For instance, if you are nearing the end of your career and expect to transition from a high to a lower tax bracket, you may be able to delay some income until after January 1^st. But even if you are likely to be in the same bracket, you can still benefit from postponing income and accelerating deductions by taking advantage of the time value of money.

One can utilize a number of strategies to postpone income:

• Arrange with your employer to have a bonus delayed until 2016
• Delay billable services
• Delay debt forgiveness income
• Hold on to appreciated assets until next year
• Structure or avoid mandatory like-kind exchange treatment
• Minimize retirement distributions
• Take an eligible roll over distribution from a qualified retirement plan
• Postpone a conversion from a traditional IRA to a Roth IRA
• Enter into installment contracts to postpone income

Similarly, there are many ways to accelerate deductions into the current year:

• Maximize Health Savings Account contributions
• Maximize IRA charitable contributions
• Bunch itemized deductions into 2015
• Pay expenses on credit to generate current deductions
• Settle insurance claims to maximize casualty loss deductions
• Make energy saving improvements before January 1^st
• Pre-pay state, local or foreign taxes
• Charitable deductions – donate appreciated long term capital gain property
• Pre-pay higher education costs

As we approach the end of 2015, thinking through and speaking over these matters with your professional advisors – CPAs, financial advisors and attorneys – can help you minimize your income tax liability and save you considerable money. If you have any questions about these matters, or indeed, about any of your estate planning, business, tax or legal matters, we would be happy to assist in any way we can. Please contact our Asheville office at 828-258-0994 or our Hendersonville office at 828-696-1811 to schedule an appointment.

We at Strauss Attorneys PLLC. wish you a wonderful new year!

Exhibit A

Tax Provision	2015	2016
Personal Exemption	$4,000	$4,500
Standard Deduction – Married filing Joint	$12,000	$12,000
Standard Deduction – Single/Separate Filers	$6,300	$6,300
Standard Deduction – Head of Household	$9,250	$9,300
Estate Tax Unified Credit	$5,430,000	$5,450,000
Annual Gift Exclusion	$14,000	$14,000
Alternative Minimum Tax Exemption Amount – Married Filing Joint	$83,400	$83,800
Alternative Minimum Tax Exemption Amount – Single/Separate	$53,600	$53,900
Foreign Earned Income Exclusion	$100,800	$101,300

Exhibit B

TABLE 1 – Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is	The Tax Is:
Not over $18,550	10% of the taxable income
Over $18,550 but not over $75,300	$1,855 plus 15% of the excess over $18,550
Over $75,300 but not over $151,900	$10,367.50 plus 25% of the excess over $75,300
Over $151,900 but not over $231,450	$29,517.50 plus 28% of the excess over $151,900
Over $231,450 but not over $413,350	$51,791.50 plus 33% of the excess over $231,450
Over $413,350 but not over $466,950	$111,818.50 plus 35% of the excess over $413,350
Over $466,950	$130,578.50 plus 39.6% of the excess over $466,950

TABLE 2 – Heads of Households

If Taxable Income Is:	The Tax Is:
Not over $13,250	10% of the taxable income
Over $13,250 but not over $50,400	$1,325 plus 15% of the excess over $13,250
Over $50,400 but not over $130,150	$6,897.50 plus 25% of the excess over $50,400
Over $130,150 but not over $210,800	$26,835 plus 28% of the excess over $130,150
Over $210,800 but not over $413,350	$49,417 plus 33% of the excess over $210,800
Over $413,350 not over $441,000	$116,258.50 plus 35% of the excess over $413,350
Over $441,000	$125,936 plus 39.6% of the excess over $441,000

TABLE 3 – Unmarried Individuals (other than Surviving Spouses and

Heads of Households)

If Taxable Income Is:	The Tax Is:
Not over $9,275	10% of the taxable income
Over $9,275 but not over $37,650	$927.50 plus 15% of the excess over $9,275
Over $37,650 but not over $91,150	$5,183.75 plus 25% of the excess over $37,650
Over $91,150 but not over $190,150	$18,558.75 plus 28% of the excess over $91,150
Over $190,150 but not over $413,350	$46,278.75 plus 33% of the excess over $190,150
Over $413,350 but not over $415,050	$119,934.75 plus 35% of the excess over $413,350
Over $415,050	$120,529.75 plus 39.6% of the excess over $415,050

TABLE 4 – Married Individuals Filing Separate Returns

If Taxable Income Is:	The Tax Is:
Not over $9,275	10% of the taxable income
Over $9,275 but not over $37,650	$927.50 plus 15% of the excess over $9,275
Over $37,650 but not over $75,950	$5,183.75 plus 25% of the excess over $37,650
Over $75,950 but not over $115,725	$14,758.75 plus 28% of the excess over $75,950
Over $115,725 but not over $206,675	$25,895.75 plus 33% of the excess over $115,725
Over $206,675 not over $233,475	$55,909.25 plus 35% of the excess over $206,675
Over $233,475	$65,289.25 plus 39.6% of the excess over $233,475

TABLE 5 – Estates and Trusts

If Taxable Income Is:	The Tax Is:
Not over $2,550	15% of the taxable income
Over $2,550 but not over $5,950	$382.50 plus 25% of the excess over $2,550
Over $5,950 but not over $9,050	$1,232.50 plus 28% of the excess over $5,950
Over $9,050 but not over $12,400	$2,100.50 plus 33% of the excess over $9,050
Over $12,400	$3,206 plus 39.6% of the excess over $12,400

TABLE 6 – Capital Gains

If Taxable Income Is:	The Tax Is:
Taxpayers in the 10% and 15% income tax brackets	0%
Taxpayers in the 25%, 28%, 33% and 35% income tax brackets	15%
Taxpayers in the 39.6% income tax bracket	20%