Year-end tax planning for 2015

October 28, 2015 by · Leave a Comment 

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’ failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).

Opportunities for Individuals

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

Opportunities for Businesses

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Below is a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

    Year-End Tax Planning Moves for Individuals

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.

If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.

If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by re-characterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.

If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015 if you won’t be subject to the alternative minimum tax (AMT) in 2015.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.

Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.

You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.

Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.

If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

    Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions in 2015.

    Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.

    Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.

    A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.

    A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

    A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for 2015. This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.

    If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.

    To reduce 2015 taxable income, if you are a debtor, consider deferring a debt-cancellation event until 2016.

    To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.

    If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

    These are just some of the year-end steps that can be taken to save taxes. Please contact us if you would like for us to tailor a particular plan that will work best for you or discuss any potential resuscitated tax-saving opportunities.

Reasons to consider establishing a trust

January 13, 2015 by · Leave a Comment 

Many people consider trusts a tool for the wealthy to avoid taxes. While trusts are a useful device for reducing estate taxes, there are many different types of trusts and tax planning is only one reason to create a trust. In fact, since the estate and gift tax exemption amounts have increased significantly over the last several years, only a small percentage of high net-worth families and business owners now face estate tax liabilities. Depending on your goals and needs for yourself or your family, the objectives for a trust can vary from the ability to direct your property after you are no longer able to control it (due to death or incapacity) to providing protection for vulnerable family members. A trust can be funded with as little or as much value as an individual desires. Property of any sort may be held in a trust.


One simple reason to create a trust is to maintain privacy. A trust can be established purely for privacy, and, in many states, that is an attractive feature. In Georgia, an individual’s Will must be admitted to probate after death to have any force and effect. During the probate process the Will becomes a public record, open for inspection by anyone. A trust is created privately by the individual working with an attorney and is effective upon its execution and funding. There is usually no need for a court to be involved and thus, none of the trust’s assets or the operative provisions in the trust agreement are necessarily disclosed to the public. For some people, simply the attraction of keeping one’s affairs private makes a trust an idyllic option.

Avoid Probate

While the probate process in Georgia is not particularly difficult or expensive, in other states the probate process can be both time consuming and expensive. Even for a Georgia resident, trusts can be used to avoid the expense and delay of a probate procedure, especially if one owns real estate located in another state.  Establishing a trust during one’s lifetime can cause the assets to be distributed to the heirs efficiently without the cost, delay and publicity of probate. Avoiding probate may also be especially attractive if you have concerns about a conflict over your Will, since the creation and administration of a trust does not require notice to anyone.

Avoid Assets Passing to Minors

Trusts are commonly incorporated in a Will to plan for an individual’s premature death and to ensure that property is not transferred outright to minor children. In a testamentary trust (a trust created under a Will when the person dies), if the children are under 18, or under some other age prescribed in the Will (ages 25 and 30 are common), a trust will be created to provide for your children during their minority or until the contingency age is reached, so that a 16 year old child will not end up owning a house with the responsibility of making mortgage payments.


An individual who would like to have control over his or her property after death may consider creating a trust to leave his or her estate to family members in a way that is not directly and immediately payable to them. For example, you may want to stipulate that your children receive their inheritance upon certain conditions being met, such as graduating from college, or you may provide for age-based distributions that provide for the trust assets to be distributed to your children in fractional shares upon attaining certain ages, such as 25, 30, and 35. This will allow them to grow into managing assets and/or to learn from their mistakes with only a portion of their inheritance. The trust can also stipulate that distributions only be made for specific purposes. For example, you can stipulate that a trust will make money available to your children or grandchildren only for college tuition or perhaps for future health care expenses.

Creditor Protection

Trusts are effective tools for individuals who have concerns about family members who are financially irresponsible or vulnerable to exploitation. In those situations, you can control how and when assets are distributed to your family members. Trusts used to protect beneficiaries against their inability to handle money can also be used to protect the beneficiary from creditors by including language in the trust that protects the trust’s assets from creditors of, or a legal judgment against, a trust beneficiary. If you have family members that are doctors, lawyers, accountants, or business owners that have liability exposure to third parties, you can create a trust which may provide protection of their assets and estate from creditors and judgments since the trust assets are not considered their personal assets.

Individuals with Special Needs

Individuals with a disabled child or family member may establish a trust to provide for the family member without compromising the beneficiary’s eligibility for government benefits. An outright distribution to a person who receives government benefits may cause him or her to forfeit important subsidies for housing and/or healthcare since such benefits are often determined based upon income and assets.


A trust can also be established to plan for your own incapacity, in which case the trust is a planning tool to protect your own assets in the event you are no longer able to manage your own affairs. You can give the trustee the power to take immediate control of your assets in the event that you become incapacitated and direct how your assets will be utilized for your care. In that case, you do not have to worry about burdening your children with making decisions regarding your care or with incurring the expense associated with your long term care.

Life Insurance

Life insurance trusts are useful since the death benefit from a life insurance policy payable to your estate would be subject to claims by your creditors or creditors of your estate. If the policy is purchased by an independent trustee and held in an irrevocable life insurance trust that is created and funded during your lifetime, then the life insurance proceeds can pass outside of your estate, but can still be used to help your family members, including help covering your estate expenses. An irrevocable life insurance trust holds a life insurance policy on the policyholder’s life and provides immediate benefits when the policyholder dies, without the necessity of having the proceeds pass through probate.

Business Owners

Individuals who own a business or hold an interest in a business may consider the use of a trust to hold their ownership in the business. Trusts can also be important for the management of family businesses and for families in the creation of a succession plan to transfer ownership between the family members. Transferring ownership of the business from one generation to the next in an efficient manner can very often be the difference among keeping the business in the family and being forced to sell it following the business owner’s death.

Marital Trusts for Blended Families

If you have been married more than once, and especially if you have children from different marriages, providing for your spouse while ensuring your children inherit from you can present some estate planning challenges. In a second marriage, each spouse brings different assets into the marriage and each may have different objectives regarding the passage of wealth to their children. You may want to support your surviving spouse, but also want to ensure that the balance of your estate ultimately goes to your children (instead of your spouse’s children) after your spouse dies. Addressing these complexities through a marital trust can provide income and even principal for a surviving spouse, while preserving the underlying assets and controlling how they are distributed to children from a previous marriage. Blended families may also want to consider establishing two trusts, one for the spouse and children of second marriage and one for the children born of a previous marriage.

Unmarried Couples

A trust should also be considered if a client is not married, but has a life partner (whether opposite sex or same sex couples). Married couples have more ability to transfer property to one another during life and after death, so unmarried couples may consider a trust to facilitate the same types of transfers even though they do not qualify for the same benefits. If unmarried partners desire to leave their property to one another, then a trust can be a useful tool to hold property jointly and to pass the property to the survivor upon death without incurring lifetime gift taxes or estate taxes.


There are many different situations which may indicate that trust should be considered. But no matter what the reason is for establishing a trust, ultimately knowing your property and the beneficiaries of your property are protected can give you peace of mind. Our attorneys have experience with all forms of lifetime and testamentary trusts and can assist you in evaluating whether a trust should be part of your estate plan.