The federal income tax rates for 2015 are the same as last year: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. However, the rate bracket beginning and ending points are increased slightly to account for inflation. For 2015, the maximum 39.6% bracket affects singles with taxable income above $413,200, married joint-filing couples with income above $464,850, heads of households with income above $439,000, and married individuals who file separate returns with income above $232,425. Higher-income individuals can also get hit by the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% net investment income tax (NIIT), which can both result in a higher-than-advertised marginal federal income tax rate for 2015.
What we’ve listed below are a few money-saving ideas to get you started that you may want to put in action before the end of 2015:
• For 2015, the standard deduction is $12,600 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,300. If your total itemized deductions each year are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions, such as charitable contributions and property taxes, in every other year. This allows you to time your itemized deductions so they are high in one year and low in the next. However, the alternative minimum tax (AMT), discussed later in this article, should be considered when using this strategy.
• If you or a family member own traditional IRAs and reached age 70½ this year, consider whether it’s better to take the first required minimum distribution in 2015 or by April 1 of next year.
• If your employer offers a Flexible Spending Account arrangement for your out-of-pocket medical or child care expenses, make sure you’re maximizing the tax benefits during the upcoming enrollment period for 2016.
• If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate with the maximum amount the company will match.
• If it looks like you are going to owe income taxes for 2015, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year.
• Between now and year end, review your securities portfolio for any losers that can be sold before year end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separately) net capital loss that’s deductible each year.
• If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year.
• Don’t overlook estate planning. For 2015, the unified federal gift and estate tax exemption is a generous $5.43 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes that have nothing to do with taxes.
• If you are self-employed, consider employing your child. Doing so shifts income (which is not subject to the “kiddie tax”) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings and the ability to contribute to an IRA for the child.
• If you own an interest in a partnership or S corporation that you expect to generate a loss this year, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end to ensure you have sufficient basis to claim a full deduction.
Remember that effective tax planning requires considering at least this year and next year. Without a multiyear outlook, you can’t be sure maneuvers intended to save taxes on your 2015 return won’t backfire and cost additional money in the future.
And finally, watch out for the AMT in all of your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. There’s a good chance you’ll be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, exercise incentive stock options, or recognize a large capital gain this year.
Again, these are just a few suggestions to get you thinking. If you’d like to know more about them or want to discuss other ideas, please feel free to call us.