Ways to Reduce Your 2015 Taxes
The following are suggested tax tips to reduce your 2015 taxes and help you be better prepared for amounts that may be due with your 2016 return.
Adjust Withholdings and Estimates
Taxpayers should look at whether their withholdings and estimated tax payments are sufficient to cover their 2015 tax liability. If a taxpayer owes with their 2014 return, it is generally easier to adjust withholdings and pay a little along, during the year, rather than having a big tax bill in April. Further, if you owe on your 2015 tax return, you could be subject to penalties for inadequate withholdings and estimated tax payments.
Maximize Pretax Deductions:
Retirement Plan Contributions
Amounts contributed to a qualifying retirement plan can reduce federal and state taxes and grow tax deferred. The principal and interest is not taxable until withdrawn from the account. Generally, taxpayers are not required to start withdrawing from a retirement account until after age 70 ½ and there is not an early withdrawal penalty for amounts received after age 59 ½. There are other specific exceptions to these rules, such as distributions received from inherited IRAs are not subject to early withdrawal penalties and distributions made due to disability or for certain medical and health insurance funding purposes. It is generally easier to fund retirement accounts a little along, during the year, rather than trying to maximize the contributions in lump sums at year end.
Health Savings Accounts
Taxpayers with designated high deductible health insurance plans are eligible to contribute to an HSA on a pretax basis. Amounts contributed to an HSA are not subject to federal and state taxes and if they are contributed through payroll deductions are not subject to FICA taxes. Amounts may be withdrawn from the account tax free as long as the taxpayer has qualifying medical expenses at least equal to the amounts withdrawn during the year. Any amounts not spent by year end are not lost and remain in the account until needed. If the taxpayer terminates the plan, they have the option of rolling any unspent funds to an IRA. The 2015 HSA limit is $3,350 for single coverage and $6,650 for family coverage.
Health Flexible Spending Accounts (FSAs)
Employer sponsored FSAs allow taxpayers to contribute on a pretax basis amounts to pay out of pocket medical expenses that may not be deductible otherwise. Employees should consider what their out of pocket medical costs will be, taking into account deductibles, copays, prescription drug costs and non-covered medical expenses, such as vision and dental expenses. Amounts contributed to a FSA are not subject to income tax or social security and Medicare taxes. Amounts contributed to a FSA can be withdrawn on a reimbursement basis, therefore the employee must have adequate records allowing for the reimbursement. Medical expenses must be incurred by the last day of the plan year, generally December 31st for calendar year plans, unless the employer has adopted the grace period allowing the taxpayer an additional 2 ½ months to spend amounts contributed. Any amounts not spent by the plan year end or grace period are lost and are not eligible for reimbursement. Employers may also allow participants to carryover up to $500 of unspent funds to the subsequent year. Therefore, make sure you have thought through your contributions. Also, amounts you are contributing to a FSA account cannot be changed during the year unless there is a major change in your life situation, such as marriage or birth of a child. The maximum amount eligible to be contributed to a FSA for 2015 is $2,550.
Dependent Care Flexible Spending Accounts
Many employers offer employees the ability to contribute to a Dependent Care Flexible Spending Account. Amounts are contributed pre-tax, not subject to federal, state and FICA taxes. The contribution limit is $5,000 per taxpayer, including married couples and amounts are reimbursed to the taxpayers by submitting adequate receipts or documentation to the account administrator. Amounts contributed to an FSA are contributed on a “use it or lose it” basis. Therefore, any amounts not eligible for reimbursement are lost. Additionally, the amount being withheld cannot be changed during the year without a life-changing event, such as an additional dependent.
Donating Appreciated Assets – Double Tax Benefit
Consider donating your investments that have increased in value rather than cash. When you donate stock or other appreciated property, you avoid the tax on the gain on the increase in value and also benefit from a deduction for the fair market value of the property donated. Conversely, if you are holding investments that have decreased in value, consider selling those and donating the cash proceeds to charity. In that case, you get a deduction for the cash donation, and also may be able to deduct the losses recognized on the sale of the property if you have other capital gains to offset.
Pay 4th State Estimate in December to Deduct
You receive a deduction on your federal return for state taxes paid during the year. Be sure to pay your January 15, 2016 state estimated tax payment by December 31, 2015 to get the federal deduction for this year. Paying by December 31st has two benefits: it decreases the federal tax for the current year and also decreases the federal estimates due for the following year (if applicable). Please note: If you believe your income has increased and you will owe taxes with your state return in April, you should increase your 4th quarter estimate for payment in December. However, keep in mind if you are subject to AMT there may be no benefit to prepaying your state taxes. Contact us if you need assistance in calculating this payment.
Bunching Deductions to Maximize Itemized Deductions
Taxpayers who are typically in a situation where they may not always have enough deductions to itemize on their tax returns, may choose to pay certain items twice in one year to increase their deductions. Examples would include: paying real estate taxes that are due at or around the beginning of the year, may be paid in January for 2015 and in December 2015. Charitable donations may be accelerated or postponed to increase the deduction into a single year. A December and January donation could both be made in December. Non urgent medical procedures that may not be covered by health insurance can be done in a single year to increase the likelihood of deduction. Paying a January mortgage payment in December or deferring a payment that is technically not due until after year end may increase your mortgage interest deduction.
Section 529 Plans for College Funding
Contributions to 529 plans are no longer deductible for North Carolina income tax purposes, however they can be a great tool to use to reduce your federal tax if you have investment income. Section 529 plans allow you to save tax on the earnings on funds that you set aside for education purposes. A specific beneficiary is designated for each 529 account. When funds are withdrawn for that beneficiary, the distributions are not taxed as long as used for qualifying education costs such as tuition, books, supplies and equipment, and also room and board. If funds are withdrawn for other purposes, the earnings are taxed and a 10% penalty is imposed, unless the beneficiary had received a scholarship. Contributions to 529 Plans are subject to gift tax, and the annual gift tax exclusion for 2015 is $14,000. You can accelerate 5 years' worth of gifts when giving to a 529 plan. Therefore, in 2015 each individual (spouse, grandparent, etc.) can give up to $70,000 (5 x $14,000) to each student/beneficiary without gift tax consequences. Consider contacting your financial advisor for assistance in selecting and investing in a Section 529 plan that is right for you. Please visit www.gordonkeeter.com and click on Resources/Useful Links/Education Planning for more information on this topic.
Business Deductions:
Reimburse Eligible Expenses
Employees and business owners should make sure they are reimbursed for all out of pocket expenses prior to year end. Reimbursement of expenses to an individual under an accountable plan results in a tax deduction for the business and the reimbursement is non-taxable to the employee. The most common types of reimbursements include mileage, cell phone, meals and entertainment and home office expenses. Under an accountable plan, the individual must have adequate documentation supporting the reimbursement, such as a mileage log or receipts. Any amounts reimbursed or paid under a non-accountable plan could be subject to income taxes on the individual’s tax return.
Section 179 Expense
Under current law, eligible businesses that acquire fixed assets may immediately write off up to $25,000 of the cost of assets purchased and placed in service before year end. The write-off cannot create a net loss for tax purposes and the business cannot have placed more than $125,000 of eligible Section 179 assets in service. Any amount over $125,000 reduces the eligible deduction dollar for dollar and the amount is completely phased out at $150,000. Note: The write-off under Section 179 has been higher in prior years and Congress may pass legislation for 2015 increasing the eligible write off and thresholds as it has done in prior years.
Using Credit Cards
Using credit cards instead of cash to make major purchases such as business equipment can produce significant bonuses. Consider using one or two bonus paying credit cards strictly for business. Note that it will be necessary to break down the items charged to the card into expense categories for record keeping. So, you may want to limit your use to major purchases and retain all credit card bills and receipts.
Consider Starting a Retirement Plan
Consider starting a retirement plan such as: SIMPLE IRA, SEP IRA or 401(k) plan. Contributions made by the Company for its owners and employees to a retirement plan are deductible by the Company.
