As we close out 2015, here are year-end moves that will make that April tax deadline less painful.
If you’re a high income earner and/or have certain types of income, you may be subject to the net investment income tax discussed in more detail below.
Single taxpayers earning more than $200,000 and joint filers earning more than $250,000 will be subject to a 0.9 percent Medicare tax on wages exceeding that amount. If your income is at or above these levels, you’ll also want to pay attention to a new 3.8 percent tax that can be levied on “investment income.” Both of these are a product of the Affordable Care Act (ObamaCare), and need to be considered when you are tax planning. Investment income currently includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from passive activities (including income for S-corporations).
Additionally, with the sunset of the Bush tax cuts a few years ago higher income earners are now subjected to higher rates on income and capital gains, as well as limitations on itemized deductions, and personal exemptions. These limitations have not received a ton of publicity, but can add up and produce an unexpected surprise when you file your return this spring.
Calculating a 2015 tax projection in December or early January will give you a good idea on how these changes will impact you when you file. Once analyzed some may want to consider making an estimate payment by January 15th to avoid underpayment penalties. While asking Santa Clause for a big tax credit is one proactive step you can take this holiday month, here are a couple of other ideas to consider in hopes of reducing your tax liability.
Keep an eye on Washington…
As was the case last year certain provisions must be extended by Congress in order to be allowed. These include making a tax-free charitable contribution from your individual retirement account, the ability to accelerate depreciation on equipment you purchased for your business, above the line deductions such as classroom/tuition expenses, the credit for qualified research expenses, and your ability to deduct state or sales taxes paid.
Take a look at your deductions
Making additional charitable contributions, and “bunching” of certain itemized deductions such as property taxes, sales tax on large purchases (if allowed, see above), interest paid, and medical/miscellaneous expense may provide an opportunity to reduce your taxable income. It is important to be aware that while these are legitimate deductions, for the majority of taxpayers they may be limited and have the potential to generate AMT tax, but still warrant consideration.
Review your investment portfolio
When meeting with your investment professional for your portfolio performance review to evaluate your current realized gains/losses, dividends, and interest, you should also discuss unrealized gains/losses, and the benefits of tax loss harvesting. An awareness of the “wash sale” rules should also be something you discuss if considering this strategy as well. Having your CPA and investment professional coordinate is critical to avoid tax surprises, and take advantage opportunities to reduce your tax liability.
Go see HR
Take a look at your most recent pay stub to make sure you are withholding at an appropriate rate, and if you are expecting a year-end bonus check at what rate taxes will be withheld on this amount. This provides an opportunity to avoid a “surprise” (under withholding), and if needed withholding in excess of your “normal” rate in lieu of having to make an estimate payment in January or pay tax in April. Maxing out your retirement plan and making sure you’ve fully taken advantage of your flexible spending plan are two other items tax payers should consider.
Consider your business
We do not advocate the shifting of earnings or spending excess cash just for the sake of reducing your tax liability, but knowing the impact your business’s net income or loss is extremely critical when projecting your tax liability. Knowing and understanding if your business reports on a cash or accrual basis allow you to evaluate the potential tax implications/opportunities. How your business is structured entity-wise will dictate your ability to take certain deductions as well, and the passive investment rules could have an impact on self-employment and net investment income tax liabilities.
Many times tax liability is an unfortunate result of your success… That does not mean that you can’t take a pro-active approach by anticipating, which will allow you to create a more effective strategy going forward.
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