It’s never too late in the year for you and your clients to get ready for next tax season.
Greg Rosica, a tax partner at Ernst & Young and a contributing author to the EY Tax Guide, has some useful advice for year-end tax planning.
“As we start to wind down the 2015 tax year with just a few weeks left, it’s important that people start to think about what their tax situation is going to be for 2015, before they actually sit down and start to do their tax return next year in 2016,” he said. “There may still be some things that they can do.”
Among the items to ponder are the dozens of expired tax breaks that Congress has not yet renewed for this year.
“There are many provisions that continue to get extended each year that did expire in 2014, but as they stand right now, they are no longer in place for 2015,” said Rosica. “Unless something gets brought up in the budget and is passed as an extenders bill, which certainly is possible, those are no longer here for us.”
Some of the perennial tax extenders include the ability for schoolteachers to take an above-the-line deduction for classroom supplies that they have purchased on thei own, the ability to take a deduction as interest for mortgage insurance premiums, the ability to take a deduction for sales tax instead of income taxes for taxpayers who live in states with low income taxes or who had many sales tax expenses, and qualified charitable distributions that people with IRAs can give directly to a charity. Even if those were valid deductions in prior years, they might not be this year if Congress fails to extend them.
“You want to be aware when you sit down to do your 2015 tax projection for the end of the year that you’re not taking deductions for them at this point because they aren’t valid deductions,” said Rosica. “Hopefully that will change by the end of the year, but we don’t really know. I think the first step right now is to sit down and take out last year’s tax return for 2014 and start to sketch out, maybe on a copy of that, what you have thus far for 2015 and see if things are different. If you think you might be in alternative minimum tax this year, if you were last year and you have similar income and expense items, there’s a good chance you will be again, or if something has changed in our life, that you take that into account as to what type of tax bracket you’ll be in.”
Clients should understand their tax bracket. “Have you reached the upper tax brackets? Maybe you’re typically in a higher tax bracket, but based on some stock losses you may have this year, that’s perhaps kept you down in a lower bracket,” said Rosica.
He advises looking at the big picture. “Start with a projection of what 2015 is going to look like and then assess what actions you should take, whether accelerating income into this year or deferring income into next year is a good strategy for you,” he said. “Then move on to deductions. Are you going to get the benefit of deductions this year, things like charitable deductions and real estate taxes? Many of those are within your control as to when you’re going to incur those kinds of things, whether you make estimated state income tax payments at the end of the year, or wait until the beginning of next year. Identifying what kind of benefit you get out of those is a great thing to be doing over the next few weeks to determine where you think you’re going to end up.”
The end of the year is a good time for high net worth clients to decide what to do about estate planning. “You want to use your annual gift exclusion, where you're eligible to give up to $14,000 a year to as many people as you choose,” said Rosica. “It expires every year if you don't use it by December 31. Make sure you've thought through that and made the appropriate gifts that you want to make during the year. It’s also a good time to look to see what lifetime exclusion you have left. If you've done some gifting that might eat into it, look at what that is, and if you want to do some additional gifting or not. Then also take into account that there are potentially some tax regulations that may come out to deal with taking discounts on certain types of assets that are gifted. It’s important to understand that and see how it fits into the potential planning that you may be doing around year-end.”
The Affordable Care Act will be an important part of tax planning for some taxpayers. “With the Affordable Care Act comes the tax penalty if you don’t have health insurance, and that’s higher this year than it was last year,” said Rosica. “If you were subject to that penalty because you didn’t get health insurance, then you’re going to have a higher penalty if you still haven’t done it. I’d be focused on that if you’re in that situation.”
Another issue associated with the Affordable Care Act is the Net Investment Income Tax, a 3.8 percent tax on investment-type income, such as interest, dividends and capital gains “If your income has gone up, in 2015 you may enter the bracket that includes the Net Investment Income Tax,” said Rosica. “Perhaps you haven’t been in that before, so keep your eyes out for any changes from prior years and start to think through what additional taxes might affect you.”
He advises looking back over any major changes that might have occurred in a client's life over the course of the year. “Reflect back on what’s happened throughout 2015, whether you’ve changed jobs or gotten married or divorced, or had any kind of life event change,” said Rosica. “It’s a good idea to start thinking about what those events, are as well as what impact they have on your overall tax situation.”