December 14, 2015

2015 Year End – Tax-Planning Advice

As the year quickly draws to a close, we wanted to offer a few tax-planning ideas to consider. We look forward to discussing what actions may benefit you the most in the upcoming year.

Qualified Small Business Stock (QSBS)
Gain on the sale of QSBS acquired between Feb. 18, 2009 and Sept. 28, 2010 may be eligible for the 75% federal exclusion. Gain on QSBS acquired between Sept. 29, 2010 and Dec. 31, 2014 may be eligible for the 100% federal exclusion.   Qualified stock acquired prior to or after these two windows may be eligible for the 50% federal exclusion. In order to qualify for the exclusion, the QSBS stock must have been held for five years. The amount of eligible gain is the greater of $10 million or 10 times your basis in the stock. QSBS is generally defined as original issue stock where the gross assets of the company did not exceed $50 million when the stock was issued. We would be happy to assist you in reviewing your stock holdings to determine if any is eligible for qualified small business stock treatment.

3.8 % Net Investment Income (NII) Tax
If you have modified adjusted gross income above $250,000 for married filing joint, $125,000 for married filing separate and $200,000 for all other filing statuses, you may want to consider strategies to minimize exposure to this additional 3.8% federal tax including shifting income to future years or recognizing additional losses. Income subject to NII includes interest, dividends, rents, passive income, capital gains, annuities, and royalties. We can assist you in the review of your income and deductions in order to minimize your exposure to the NII tax.

Roth Conversion/Recharacterization
You may want to consider converting your traditional IRA to a ROTH IRA before the year end if you expect to be in a lower tax bracket this year or if the value of your traditional IRA assets is low. If you are interested in converting, we can help you to determine the tax consequences and  optimize the conversion amount.  If you converted earlier in the year and the value of the assets has since decreased, you can recharacterize (i.e. revert the conversion) and reconvert at a later time. The primary benefit of a ROTH IRA is that the assets grow tax-free and there is no requirement to take minimum distributions later in life.

Loss Harvesting
Consider harvesting unrealized capital losses to offset any net realized capital gains. If you own securities that have become worthless or made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction.

IRA Charitable Contribution
The provision allowing direct IRA charitable gifts to public charities (limited to $100,000 per annum) expired in 2014.  This may be extended under new changes in legislation.  We will update you immediately if this provision is extended.

Required Minimum Distribution (RMD)
Individuals older than 70 ½ must take the RMD by the close of the year.  If you turned 70 ½ in the current year, you have until April 15, 2016 to take the distribution.

Annual Gifting
Consider utilizing the annual $14,000 gift tax exclusion. This can be made to an unlimited number of individuals with the benefit of removing these assets from your estate. In addition, the lifetime exclusion (the amount you are allowed to give in excess of the annual gift exclusion during life or upon death) continues to rise; it is $5,430,000 per person for 2015.   In 2016, the gift tax exclusion will remain at $14,000 while the lifetime exemption has increased to $5,450,000.  We would be happy to assist with more comprehensive estate and tax planning to effectively utilize your lifetime exemption. Remember, you can pay directly for tuition, dental or medical expenses for anyone without using either the annual exclusion or lifetime exclusion.

Charitable Contributions
Charitable contributions provide current tax savings (generally offsetting your highest taxed income first). Charitable gifts can be made in cash, stock, or other various assets. You may want to consider different charitable recipients such as donor advised funds, community foundations, or public charities.  If you administer a private foundation, please ensure that you satisfy the grant requirements prior to year-end.  Long term, highly appreciated assets provide the most tax savings due to the double benefit of the tax deduction and avoidance of the capital gains tax on the appreciation. We can assist in advising you on optimizing the amount of charitable giving this year as the tax rules related to charitable giving can be complex.

Pre-pay State Income Tax
In specific scenarios, accelerating your estimated state income tax payments can be highly advantageous. By pre-paying in December 2015 as opposed to January 2016, you will be allowed a federal deduction that may offset your current year income. Although this strategy may not be beneficial if you are subject to the alternative minimum tax in the current year, you may receive a benefit related to the net investment income tax. We consider the benefits of pre-paying state taxes with all clients and can advise the best course of action.

Stock Options
If you own options on high-dividend-paying stock, options with a fast approaching expiration date, or options with an exercise price well below today’s market value, it may be time to consider exercising. When to exercise options is often a matter of personal preference based on your own beliefs in the future potential in the stock.  However, there are major tax considerations; we recommend consulting with us at year end to review your long-term financial goals and current tax position.

Section 179 Deduction and Depreciation (For Businesses)
Businesses are still allowed to expense up to $25,000 under Section 179 (available only for qualified property). We can advise you on which assets are best suited for the Section 179 election.  If you own rental properties and are contemplating repairs or upgrades, we can evaluate whether it makes sense to complete such projects prior to the end of the year.  Bonus depreciation is currently not available, but there is a possibility that it may be extended with the passing of new legislation; we will update you immediately if this provision is extended. In addition, if you incurred costs related to the acquisition, production, or improvement of tangible property, we recommend review of these at year end to ensure that they are identified and properly accounted for under IRS regulations.