December 2015 – An End of Year Tax Update

The June Supreme Court decision upholding Affordable Care Act provisions eased some concern about the law’s effect on 2015 tax returns. Yet as year-end approaches, Congress once again has a lot of work to accomplish. While comprehensive tax reform is not on the schedule in the final months of 2015, the perennial “extenders” legislation is. When the fate of these 50 or more tax provisions will be finalized is unclear.

What is clear is that delaying your tax planning will equal missed opportunities. Though making sound decisions in the face of uncertainty is difficult, informed action can put you in a position to take advantage of current developments as they unfold.

This update is a reminder that tax planning is a process, and successful planning favors the prepared. It’s important to weigh the risks and rewards of tax-saving moves you can take now while maintaining the ability to respond rapidly and effectively to the inevitable changes. Get started by reading the suggestions in this update. Feel free to share the information with friends and associates.


The end of 2015 is rapidly approaching. Do you have everything in order so you can finalize this year’s tax planning? If not, that’s okay. Given the frequency of tax law changes, there is no perfect time to begin planning. There’s no need to wait for certainty on laws that are in limbo either. This year, basic old-fashioned tax planning techniques can go a long way.

Here are some suggestions.

●        Convert to a Roth

Despite the fact that you’ll pay federal income tax when you convert your traditional IRA to a Roth, making the switch can be a wise part of multi-year planning. For example, if the value of the investments in your traditional IRA is at a low point, you might consider using a partial conversion to “fill” a tax bracket. As you know, brackets are based on taxable income. By watching the breakpoints, you can manage the rate you’ll pay on the conversion. The idea is to pay tax at the lowest possible marginal rate.

The future benefit of making a conversion comes from the removal of assets from your traditional IRA. That can help reduce taxable income in a later year when you’re required to take withdrawals.

●        Get your basis right

Basis affects the amount of gain you report and pay tax on whenever you sell or exchange assets, so getting it right can mean tax savings. While your broker is required to track and report your basis for many securities, you are ultimately responsible for putting the correct numbers on your return. And, for tax planning to be effective, you have to be sure your basis is accurate before you decide which investment to sell.

You already know basis in investments such as stock is what you paid plus costs of buying and selling such as commissions. But you’ll want to keep a record of other changes to the stock too, including splits, which can affect your basis per share. Those records are especially useful if you’re not selling your entire investment.

For mutual funds, add reinvested dividends and capital gain distributions to your cost. Because you pay tax on those items in the year of distribution, they increase basis and reduce your overall gain.

Accurate basis information can also save you money if you funded a traditional IRA with nondeductible contributions in prior years. Those contributions reduce the taxable amount of withdrawals.

Maintain an up-to-date list of home improvements and renovations too. You can currently exclude up to $500,000 of gain from the sale of your home when you’re married ($250,000 when you’re single). But you have to meet the requirements to qualify, such as the rule that says you can claim the full exclusion only once every two years. Otherwise, you may be eligible for a partial exclusion or none at all.

●        Check retirement contributions

Contributions to your 401(k) plan made before year-end will reduce your adjusted gross income and may preserve credits and other tax benefits. Check now to make sure you’re on track to contribute the maximum for 2015. Why? In addition to being able to spread an increased contribution over remaining paychecks, you may have to give your employer time to make the payroll change.

You might also consider whether you can request that your employer put part or all of a year-end bonus into your 401(k). Just verify you’re making the most of your employer’s matching contributions.

For 2015, the maximum 401(k) contribution when you’re under age 50 is $18,000. You can add an additional $6,000 when you’re 50 or older.

●        Benefit from your home

Consider whether accelerating real estate tax and mortgage payments can help boost your itemized deductions for the year. One caution: Be aware of your exposure to the alternative minimum tax, as some itemized deductions are not allowed under the AMT calculation.

Another suggestion: Document home office use and expenses. While you have the option of choosing a simpler safe-harbor method for claiming the home office deduction, the only way to make sure you’re getting the most benefit is to compare the results from both methods.

●        Get your business expenses in order

When calculating your business income as part of your tax planning, take time to make sure you’ll be able to deduct all your expenses. For example, business expenses must be common in your field, and helpful and appropriate for your business – otherwise known as the “ordinary and necessary” rule. Remember you’ll need enhanced records such as logbooks and receipts to deduct vehicle mileage and travel and entertainment expenses. Schedule recurring bills for payment before the end of the year, and learn what expenses you can prepay and deduct on your 2015 return. Separate personal and business expenses and reimburse yourself from the company checking account for any costs you paid with your own funds.

●        Plan how you’ll pay what you owe

Even the best planning generally can’t eliminate all tax liability. If your review shows you owe more tax than you’ve already paid in, look into tax-smart ways of paying. You want to be careful you don’t create more taxable income. That could happen if you sell stock or take distributions from retirement accounts to generate funds to pay your tax.

Also be aware of the penalty rules for underpayment of federal income tax. If you receive income not subject to withholding such as alimony or rent, increasing the amount withheld from your paycheck between now and the end of the year can help avoid a penalty. If you’re married and both working, remember to account for the 0.9% Medicare surtax when your joint income exceeds $250,000.


Many of today’s tax rules were designed with families in mind. For instance, if you and your spouse are both employed, you may be eligible for a child care tax credit of up to $2,100. Your children must be under age 13, and the care must be necessary for you to be employed or attend school full-time.

You’re probably already familiar with dependent exemptions for your children. But did you know adult relatives can also be claimed as dependents? To qualify, your relative’s income must be under $4,000, and you have to provide more than 50% of their support. Surprisingly, a relative doesn’t have to live with you. However, unrelated adults who meet the income and support test are required to live with you for the whole year.

Medical costs of adult dependents are also deductible. As a general rule, the combined out-of-pocket health care costs of you, your spouse, and your dependents are deductible to the extent the costs exceed 10% of your adjusted gross income. You can also use your flexible spending account to cover medical expenses of qualifying adult dependents.

One more medical expense-related tax saver is “ABLE” accounts (the acronym stands for Achieving a Better Life Experience). These tax-exempt savings accounts can be used to pay qualified expenses for you or your family members who became blind or disabled before age 26. The maximum allowable contribution to ABLE accounts is $14,000 per year.

Your family can shoulder some of your tax burden too. Consider maximizing the annual gift tax exclusion by transferring as much as $14,000 to each family member. Investment income after the transfer will be taxable to your family members, who may have a lower tax rate than you do. This “income shifting” can be important if you’re subject to the 3.8% net investment income surtax that comes into play when your adjusted gross income exceeds $250,000 ($200,000 for single filers).

A caution: When making gifts, be aware of the “kiddie tax.” Children under age 18 with unearned income of more than $2,100 might be taxed at your rate instead of their own. Unearned income includes interest, dividends, and capital gains. The rules also apply to full-time students under age 24 who still depend on you for most of their support.

You can skip the kiddie tax problem by making payments of tuition or medical costs of another person directly to the billing institution. These gifts are also excluded from the gift tax calculation.

Another way to avoid the kiddie tax: If you’re a sole proprietor, you can put your children on the payroll. Earned income is not included in the kiddie tax calculation.


If you, your spouse, or your dependents sign up for one or more post-secondary courses this year, you may qualify for education credits or deductions on your 2015 income tax return. Here’s what you need to know as you begin year-end planning.

What benefits are available

Two credits are available for tuition and enrollment fees you pay in 2015, and an expired deduction for such fees (up to $4,000) is likely to be renewed in a tax extenders bill before year-end.

Remember that credits reduce taxes directly, dollar-for-dollar. Deductions reduce taxable income.

The details

The two credits are the Lifetime Learning Credit and the American Opportunity Credit. Both are available when you pay qualifying tuition and fees during 2015, including amounts paid for any academic period beginning between January 1 and March 31, 2016. You can claim only one of the credits for each eligible student in the same year.

●        The Lifetime Learning Credit applies to tuition and enrollment fees you pay for most higher education courses, up to a ceiling of $10,000 each year. The credit is 20% of your expenses, for a maximum tax reduction of $2,000. Qualifying students must be enrolled in at least one post-secondary course but need not be pursuing a degree. The amount of the credit is phased out as income approaches an inflation-adjusted ceiling, which is $65,000 ($130,000 for joint filers) for 2015. Only one Lifetime Learning Credit per family is allowed each year.

●        The American Opportunity Credit applies to expenditures you incur in pursuit of a degree or other recognized educational credential. The credit is equal to 100% of the first $2,000 spent plus 25% of the next $2,000, resulting in a maximum credit of $2,500 for each of the first four years of post-secondary education. The credit phases out as income approaches an inflation-adjusted ceiling ($90,000 when you’re single, $180,000 for joint filers in 2015). The American Opportunity Credit is 40% refundable, so you can receive a refund of up to $1,000 even if you have no tax liability.

In addition to tuition and fees, the American Opportunity Credit can be claimed for costs of required course materials. The credit is allowed for each qualifying person (you, your spouse, and your dependents).

If you think you or a family member might qualify for one or both of these credits (or the tuition and fees deduction, if reinstated), give us a call to review the rules as part of your year-end planning.


In June, a U.S. Supreme Court ruling allowed the Affordable Care Act to continue in its present form. That means you’ll need to consider the law’s provisions in your year-end planning. Here’s a review.

●        Premium credit for individuals.

This federal tax credit provides a subsidy to help pay health insurance premiums. The amount you can claim depends on income and family size. Planning tip: Adding a dependent or getting a raise can affect the amount of your credit. Run the numbers before year-end to avoid an April 15 surprise.

●        Individual penalty.

The penalty applies when you or your dependents do not have health insurance during the year and don’t qualify for an exemption. Planning tip: If you were uninsured for no more than two months during 2015, the penalty doesn’t apply.

●        Net investment income surtax.

The 3.8% surtax applies to net investment income when your adjusted gross income (AGI) exceeds $250,000 when you’re married filing jointly ($200,000 when you’re single or filing as head of household). Planning tip: Net investment income includes dividends, interest, and capital gains (minus related expenses). Consider tax-efficient moves such as rebalancing assets between taxable and tax-deferred accounts.

●        Medicare surtax on wages.

The 0.9% surtax applies to wages, compensation, and self-employment income when your AGI exceeds $250,000 and you’re married filing jointly ($200,000 when you’re single or filing as head of household). Planning tip: Your employer is not required to withhold for the surtax unless your wages exceed $200,000. If you’re married and your joint income exceeds the threshold, revise 2015 estimates or withholding to avoid penalties.

●        Employer penalties.

These penalties apply when you don’t provide affordable health insurance to employees. For 2015, the penalties can apply when 100 or more full-time employees work in your business. The penalties begin in 2016 when your business employs 50 or more full-time workers. When you employ fewer than 50 workers, you’re not subject to the penalties. Planning tip: Make sure workers are classified correctly as employees or independent contractors.

We are committed to providing you with rational, informed and well-reasoned tax and financial advice. We thank you for your continued trust and support. Your input is always welcome and we ask that you contact us with any questions or concerns.

This update is issued annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For guidance in applying the tax rules to your individual circumstances, please contact us. ©MC

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