Written by Mary Boncada, CPA/ January 7, 2016
A large number of tax law changes have taken place in recent years. There are new, expired or extended tax laws, changes to tax brackets, standard deductions, personal exemptions, and other items that may directly affect your 2015 tax return. The purpose of this article is to alert you to changes that may present tax planning opportunities as well as potential pitfalls.
The topics are categorized into three different sections: Topics of Special Interest, Annual Adjustments and Other Tax Provisions and Tax Extenders.
The Affordable Care Act (ACA) is the largest single change to the tax code in 20 years. The act, will affect most, if not all, tax returns, even if it is only checking a box on the tax return. ACA is too complicated to cover in detail in a letter. Presented below are just a few health care related items that may affect your future tax situation:
Health Insurance Penalty - All Americans are now mandated to have health insurance, or pay a tax penalty. In 2014, this penalty was the greater of 1% of household income or $95 per person. 2015 saw an increase in this penalty to 2% of total household income or $325 per person. Because the penalty increases annually, acquiring health insurance sooner than later, will help to reduce or avoid the penalty going forward. Certain individuals are exempt from the penalty.
Premium tax credit – The premium tax credit, or PTC, is a refundable credit that helps eligible individuals and families with low or moderate income afford health insurance purchased through a Health Insurance Marketplace. To get this credit you must file a tax return. To be eligible, you cannot file a Married Filing Separate return or be claimed as a dependent by another person. More information on the premium tax credit including an interactive tool to determine eligibility can be found at: www.irs.gov/Affordable-Care-Act/Individuals-and-Families/The-Premium-Tax....
Flexible Spending Accounts (FSAs) - FSAs allow the use of pre-tax dollars to pay health care costs. FSA's, once use-it-or-lose-it plans, now give employers the option to permit employees to roll over up to $500 to the following plan year. Note that such a roll over generally will make you ineligible to participate in a Health Savings Account (HSA) in that following plan year. For further information regarding FSA or HSA plans offered by your employer, contact your plan administrator.
Retirement related changes:
IRA rollover rule - Beginning in 2015, only one rollover from one IRA to another (or the same) IRA in any 12-month period is allowed regardless of the number of IRA accounts owned. The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, basically treating all as one IRA for limit purposes. However, transfers made via Trustee-to-Trustee transactions between IRAs and rollovers from traditional to Roth IRAs are not limited.
MyRA Account – MyRA is a new retirement savings account intended for people with taxable compensation income but who lack access to an employer-sponsored retirement plan. MyRA is a Roth account so contributions may be withdrawn tax-free at any time and earnings distributed without penalty once the owner is 59.5 and the account is held at least 5 years. There are no fees associated with the account, and it will hold only one type of investment, a new Treasury security which is backed by the U.S. government meaning savers can never lose their principal investment.
MyRAs may attain a lifetime balance of no more than $15,000 and may be held for no more than 30 years from the date opened. Individuals may set up automatic paycheck direct deposits to a MyRA through their employer; fund one by direct, one-time, or recurring contributions from a checking or savings account; or direct all or a portion of their federal income tax refund to it. The accounts are portable.
Income tax rates for ordinary income remained at 10%, 15%, 25%, 28%, 33%, 35% and maxed out at 39.6% in 2015. The top rate for qualified dividends and long-term capital gains remained at 15% for all taxpayers except for high income taxpayers. The same taxable income thresholds are used to apply a capital gains rate of 20%.
Qualified Dividends and Capital gains rates:
Tax rates on capital gains and qualified dividends remained at 0%, 15%, and 20% in 2015. When combined with the net investment income tax of 3.8%, the total top capital gains rate could be as high as 23.8%.
Alternative minimum tax:
The 2015 AMT exemption amounts were $83,400 (MFJ/QW); $53,600 (Single/HOH); $41,700 (MFS). Legislation also continued to allow capital gains to be taxed using the lower capital gains rates for AMT. AMT tax rates remained at 26% and 28%.
Itemized deductions/personal exemption phase-outs:
The 2015 AGI threshold at which itemized deductions may have become limited was $309,900 ($258,250 for single filers, $284,050 for head of household filers, and $154,950 for married individuals filing separately). Certain medical expenses, investment interest, casualty, theft, and gambling losses were exempt from the itemized deduction phase-out. Personal exemptions were fully phased out when AGI exceeded $432,400 ($380,750 for single filers, $406,550 for heads of households, and $216,200 for married filing separately).
For the third year in a row, contribution limits for IRA's remained at $5,500 for 2015. Similarly, the additional "catch-up" contribution for employees 50 and over remained unchanged at $1,000. Income limitations and participation in a qualified retirement plan affected the deductibility of any contribution.
As with the traditional IRA, Roth contributions remain unchanged at $5,500 (or $6,500 for the 50 and older group) for 2015. Modified adjusted gross income determines who can contribute and how much can be contributed to a Roth. For 2015, the phase-out limits began at $183,000 ($116,000 single and head of household filers, $10,000 married filing separate filers).
Employer-sponsored Retirement Plan Contributions:
Salary reduction contribution limitations to IRC 401(k) type plans increased to $18,000 in 2015. Employers may have allowed those age 50 or over to contribute an additional $6,000 in 2015. The salary deferral limitation for SIMPLE plan participants increased to $12,500 for 2015. SIMPLE plan catch-up contributions for participants age 50 and over also increased to $3,000 in 2015.
Health Savings Accounts:
Health Savings Accounts are a pre-tax savings tool, which enable individuals with high deductible health insurance to make pre-tax contributions to cover health care costs. For 2015, individuals may have contributed up to $3,350 for self-only coverage and $6,650 for family coverage. The additional tax on distributions from an HSA or an Archer MSA that were not used for qualified medical expenses remained at 20%.
Standard mileage rates:
The 2015 optional mileage allowance for owned or leased autos increased to 57.5 cents per business mile (2014 was 56 cents). The 2015 rate for medical miles was 23 cents per mile, down from the 2014 rate of 23.5 cents.
On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The new law extended several tax provisions to be retroactive to the beginning of 2015, and also makes some provisions permanent. The list that follows identifies some of the more common tax extender items that have been reinstated retroactive to January 1, 2015, along with a brief description of the provision:
Permanent Extenders for Individuals
Enhanced American Opportunity Tax Credit (Hope Credit)
The American Opportunity Tax Credit (AOTC) is an enhanced version of the Hope Credit, allowing a credit of up to $2,500 for four years of post-secondary education. The credit is subject to phase out based on adjusted gross income. The new law makes the AOTC permanent.
The new law makes the adjustment to income for qualified expenses of elementary and secondary school teachers permanent. The law also indexes the current expense cap of $250 for inflation beginning in 2016.
State and local general sales taxes
The provision allowing an itemized deduction for state and local general sales taxes instead of state and local income taxes on Schedule A, Form 1040, was made permanent under the new law.
Charitable contributions of IRA distributions
The ability to make annual tax-free distributions of up to $100,000 to a qualified charitable organization by individuals age 70 ½ and older was made permanent under the new law.
Two-Year Extenders for Individuals
Discharge of principal residence indebtedness
The provision allowing exclusion from income for discharge of qualified principal residence indebtedness of up to $2 million ($1 million for married taxpayer filing a separate return) was extended through 2016.
Itemized deduction for mortgage insurance premiums
The provision allowing mortgage insurance premiums to be deducted as mortgage interest, subject to phase out based on adjusted gross income was extended through 2016.
Tuition and fees deduction
The provision allowing an above-the-line deduction for tuition and fees paid for the taxpayer, spouse, or dependents and claimed as an adjustment to income, was extended through 2016.
Nonbusiness energy property
The credit for purchases of nonbusiness energy property was extended through 2016.
Effective tax planning requires a year-round effort each year, especially as your overall financial position changes. If you wish to discuss the provisions affecting you as well as the available tax strategies that would be appropriate to minimize your tax liability and maximize your tax savings, please give us a call at 732-739-8991 or email us at Plan@ShapiroFSG.com to set up an appointment.