2015 year end tax and financial planning letter

PDF copy of the letter

Click on the above link for a pdf copy of the letter.

December 1, 2015

Dear Clients and Friends,

Planning ahead is always a smart idea, and that’s especially true when it comes to your taxes. As 2015 draws to a close, there’s still time to make the most of strategies that can help reduce your tax bill come April 15th and allow you to reap other potential financial benefits. Please contact us at your earliest convenience to discuss your tax outlook and develop an individualized approach designed to address your unique financial concerns. We continually monitor the tax code for changes that will benefit you. Tom has spent 40 hours this year in continuing education classes to ensure he is on top of the most current changes. Congress continues to discuss last minute income tax bills and you can be assured we stay abreast as they occur! Some of the many actionable tax savings and compliance actions we can explore with you are described below.

Don’t Miss Valuable Deductions and Credits
It’s always a good idea to claim all the deductions or credits for which you qualify. Maximizing your retirement contributions, for example, offers two benefits:
• Depending on the type of plan, you may be able to deduct those contributions from your income.
• At the same time, of course, you also add to your retirement nest egg.
• Some plans require you to contribute by year-end while others give us until 4/15/16 or even 10/15/16.
• If you have self-employed income or 1099 income you have an even greater opportunity to reduce your tax bill by utilizing our favorite savings vehicle, the i401k.
Charitable gifts can also lower taxable income as well as the child and dependent care credit may help reduce your costs for care regardless of your income. These are all possibilities to explore now to decrease the tax you’ll have to pay when you file your return in 2016. In addition, you still can qualify for numerous other overlooked or misunderstood deductions and credits that can lower your tax bite.

Prepare for Possible Loss of Certain Tax Deductions
Unless Congress extends certain tax benefits, they will go away this year and cannot be claimed on your next return. For example, in 2014 a taxpayer could deduct the higher of his or her state income tax or state sales tax. If the sales tax deduction is not renewed, your tax liability could increase significantly, especially if you live in a state with no income tax and you are accustomed to deducting sales taxes, such as Florida.
In addition, if the law is not changed by the end of the year, taxpayers:
• Can no longer use an above-the-line deduction for tuition and related expenses for college or graduate school; this deduction was helpful for those with higher incomes who cannot qualify for education credits
• Over age 70½ can no longer exclude from income any distributions made from individual retirement accounts to qualified charities
• The primary residence exclusion for taxpayers whose homes have gone through a foreclosure or short sale ended in 2014. You will now have to pay taxes on the amount of any mortgage forgiveness and will receive a 1099-C. We must get a copy of Form 1099-C in order to properly analyze your situation (if you are insolvent, contact us for more information on how this rule applies in your situation)

Plan for the Alternative Minimum Tax (AMT)
It’s estimated that nearly 4 million taxpayers were subject to the AMT in 2014, and that number is expected to grow. There is a wide range of AMT triggers that could subject you to the tax, including many factors associated with substantial deductions. The AMT exemption rose for 2015, to $53,600 for single taxpayers and to $83,400 for married couples filing jointly.

The good news is that there are ways to plan around the AMT, including accelerating or delaying income or expenses if you’ll be subject to the tax in one year but not another; lowering taxable income through retirement account contributions; or managing when you receive capital gains or dividends.

Review Your Approach to Health Insurance Costs and Coverage
• Do you have health insurance coverage? If not, you will likely face a penalty. Under the Affordable Care Act of 2010 (some people call it Obamacare), the amount you had to pay for failure to have coverage started out relatively low, up to a maximum of $285 per family in 2014. It jumped to a maximum of $975 this year, and it’s set to more than double again in 2016 to a maximum of $2,085 for each family.
• All Americans will be affected in some manner by the Affordable Care Act. Five new tax forms were released by the IRS as a result of this act for 2014. If you received a Form 1095 from any issuer or agency we MUST have all copies to prepare your tax return. If you did not receive a 1095 we must ask you a number of additional questions about insurance coverage so that we can help you avoid any penalties for failure to have health insurance.
• Besides avoiding the penalty, another way to lower your taxes is to take advantage of medical flexible spending accounts (FSAs), which allow you to set aside pretax dollars to cover unreimbursed medical bills. This year, you can contribute up to $2,550 to an employer-sponsored FSA, and, unlike in the past, instead of losing all of your FSA contributions if you don’t use them by year-end, you can now carry over as much as $500 from one year to the next.
• If you are enrolled in what the IRS defines as a high-deductible health plan, you might be eligible to contribute to a health savings account (HSA), which can offer you a pre-tax option for covering your deductible. In 2015, the contribution limits are $3,350 for individuals and $6,650 for a family. And there’s no time limit on when you can use your contributions to cover unreimbursed qualified medical expenses. We are big fans of HSA’s!
Now is the time to review and update your health insurance status as necessary to maximize your options and avoid any last-minute surprises when you file your taxes.

Foreign Accounts
If you have read any news in the last year then you know that the IRS is looking closely for offshore accounts. If you have an account, retirement account, or business interest with a value over $10,000 in a foreign country, or a foreign business ownership (not through a mutual fund) please let us know as some special rules will apply to you. There are substantial penalties for failure to disclose these items.

Mortgage Interest
We must obtain Form 1098 from you when you pay mortgage interest. Additionally we must obtain refinancing closing statements (the HUD-1), and if you drew money out on a home mortgage or refinancing we must have general information on the use of the money according to the IRS.

Children/Student Tax Returns
Under absolutely no circumstances can you allow your dependent children or college students to file their own returns this year. We must file their return because of the Affordable Care Act. Allowing a child to file their own return, particularly a student, can cost the child and parent literally thousands of dollars in Health Care penalties and/or credits.

Minimize the Bigger Tax Bite for Affluent Taxpayers
High-income taxpayers have had an even greater incentive to lower their taxable income in recent years. Not only has the top tax rate risen, but there also is a higher Medicare tax on wages, a new tax on investment income, and increased dividend and capital gain tax rates. At the same time, some popular tax deductions and personal exemptions are now off limits for affluent taxpayers. That’s why it’s important to act now to ensure that you can take full advantage of opportunities to minimize your income and benefit from tax-advantaged options. We often like to use municipal-bond investments in lieu of other taxable investments to help offset these higher taxes.

Sort Out Capital Gains and Losses
If you are expecting to face capital gain taxes this year, tax-loss harvesting can help reduce what you’ll pay. It involves selling any investment that has declined in value before year-end, including stocks, bonds and mutual funds, so that the capital losses you report can offset your capital gains. You might also want to sell these investments as part of your overall investment strategy if, for example, there have been changes in the markets or in your investment goals during the year and you want to rebalance you portfolio to better reflect your financial needs. Keep in mind, too, that you can deduct up to $3,000 of capital losses from your taxable income, so selling losing investments before year-end can be a smart move even if you don’t need to reduce capital gains taxes this year. You may also gift investments with a gain and not have to claim the gain as income, as us how!

And don’t neglect the potential tax consequences of mutual fund capital gain distributions, especially since many funds schedule their distributions around year-end. If you’re considering reorganizing your investments and one of your funds will make a distribution soon, you may want to ensure you sell that fund in time to avoid a taxable gain.

Roth IRA Conversions
There are a number of advantages to conversions but there are an equal number of disadvantages that carry some major tax consequences. Let us run a conversion analysis for you to determine what is in your best interests. Please do not convert your accounts in 2015 without discussing with us first. All conversions for 2015 must be completed by December 31, 2015.

If you are in what the press has called the 2% club, be aware that the rest of America will soon be joining you! When the surtaxes on this group of Americans were passed, the President purposefully did not adjust the thresholds for inflation, and in 6 years over 50% of all Americans will pay these surtaxes based on estimated inflation rates. Begin planning now whether you are a 2% club member or not by, in order, maximizing 401-k contributions; utilizing employer-sponsored cafeteria plans to their fullest limit; investigating and using employer sponsored fringe benefits such as child care and education; use municipal bonds in your investment portfolio; turn in job expenses for reimbursement; and consider your marital status as your income increases because of the incredible marital penalty built in to the surtaxes.

Avoid a Growing Problem: Tax-Related Identity Theft
Nearly 3 million people were the victims of tax-related identity theft in 2014, according to a report from the U.S. Treasury Inspector General for Tax Administration. In a typical case, scammers use your Social Security number to get a fraudulent refund. You may not be aware that it’s happened until you file your own return and are told by the IRS that another return has already been filed in your name. In the meantime, the scammer has collected your refund. In other cases, taxpayers receive collection notices from the IRS for taxes they don’t owe or refer to employers they never worked for. Victims of these scams should act immediately, contacting law enforcement, the Federal Trade Commission and the credit rating agencies. In addition, we can offer advice on how to respond to any tax notice you receive and on how to avoid falling prey to identity theft.

We’re looking forward to working with you to identify these and other tax-saving opportunities and put them to work to lower your tax outlay. Please share this letter with family and friends that you think can benefit from this advice. Please call our office today 410-823-5442 to set up your year-end tax season review.


Tom Taylor, CPA/PFS