Additional Year-End Tax Planning Considerations
Due to uncertainty about expired tax breaks, this year's tax planning is sure to be just as complicated as last year, with individuals and businesses unsure of whether tax breaks will still apply at the end of 2015. Tax legislation signed into law last December extended several expired tax breaks, but only through the end of 2014.
While Congress discusses potential legislation to extend or make permanent some expired tax provisions, it's difficult to predict what will ultimately be signed into law. Some year-end tax planning strategies cannot be utilized until after Congress' final bill is established, so there are still many solid strategies to consider now.
Traditional Year-End Planning Strategies for Individuals
Generally, the traditional income deferral/exclusion and deduction/credit acceleration techniques may be used to reduce an individual's taxable income:
For Income Deferral/Exclusion.
- Receive bonuses after year-end
- Minimize retirement distributions
- Do not redeem U.S. Savings Bonds
- Delay Roth IRA conversions until the start of 2016
- Off-set tax losses against current gains (also called loss harvesting)
- Postpone the sale of appreciated assets
- Make tax-free gifts or donations of $14,000 per recipient ($28,000 for married joint filers)
- Use like-kind exchange transactions
- Complete installment sales that defer gain
- Defer billings and collections
- Declare any special dividends in 2016
- Defer corporate liquidation distributions until 2016
- Bunch itemized deductions into 2015 and standard deductions into 2016
- Accelerate bill payments in 2015 (real estate taxes, mortgage interest, medical expenses, etc.)
- Pay final estimated state tax installment in 2015
- Minimize AGI limitations on deductions and credits
- Make an IRA contribution before April 15, 2016 (up to $5,500 per individual, with catch-up contributions of an additional $1,000 available to individuals age 50 and older)
- Maximize net investment interest deductions
- Match passive activity income and losses
Prepare for possible revival of expired business breaks
Year-end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired on December 31, 2014:
- Enhanced Section 179 Expensing Election - Section 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets before 2015. The deduction was phased out, on a dollar-for-dollar basis, to the extent that qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election beyond 2014, these limits have dropped to $25,000 and $200,000, respectively.
- Fifty Percent Bonus Depreciation - Also expired at the end of 2014, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it's unavailable for 2015 (with limited exceptions).
Lawmakers may restore enhanced expensing and bonus depreciation retroactively to the beginning of 2015, but they probably won't take any action until late in the year. In the meantime, how should you handle qualified asset purchases?
- If you need equipment or other assets to run your business, acquire it regardless of the availability of tax breaks.
- For less urgent asset needs, consider spending up to $25,000 — the amount you'll be able to expense regardless of whether Congress extends the expired breaks.
- For additional planned asset purchases, consider taking a wait-and-see approach and be prepared to act quickly if and when “tax extenders” legislation is signed into law.
In order to qualify for depreciation tax breaks on your 2015 tax return, you'll need to place assets in service by the end of the year, instead of just paying off this year's expenses.
Make sure you are well-informed about Research Credit, the Work Opportunity Credit, Empowerment Zone Incentives and a variety of clean energy-related tax breaks.
Traditional Year-End Planning Strategies - Businesses
As always, consider traditional year-end planning strategies, such as deferring income to 2016 and accelerating deductible expenses in 2015. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year, or pay some expenses in advance to accelerate deductions.
If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year-end bonuses accrued in 2015 even if they aren't paid until 2016 (they must be paid within 2.5 after the end of the tax year).
Deferring income and accelerating deductions isn't the best strategy in all circumstances. If you expect your business's marginal tax rate to be higher next year, you may be better off accelerating income in 2015 and deferring deductions to 2016. This strategy will increase your 2015 tax bill, but it can reduce your overall tax liability for the two-year period.
Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible; doing so will lower your tax bill.
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