Some Updates and Reminders for Closing 2015 and Beginning 2016
As we ring in the New Year and put last year to rest, I wanted to take some time to run down a list of tax and financial topics of interest. These items are things of importance to consider as you prepare for 2016 which would include your 2015 tax filing and 2016 tax planning. Let’s begin with tax items.
Filing Date – 2015 Form 1040 Due Date – April 18, 2016 – Emancipation Day is an official holiday in the District of Columbia and with this day falling on Friday, April 15, the official due date of your 2015 Federal Income Tax Return will be Monday, April 18, 2016.
The December 2015 law, aptly named “Protecting Americans from Tax Hikes of 2015” was signed into law on December 18, 2015. The extensions of these tax breaks were retroactive to the beginning of 2015. Several of the benefits were extended for two years (2015 & 2016), some through 2019 and others effective on a permanent basis. I have tried to narrow down the provisions and list the most applicable items.
- Homeowners can treat mortgage insurance premiums as deductible home mortgage interest for 2015 & 2016. This benefit is subject to a phase-out based on adjusted gross income.
- Homeowners can generally claim a credit of up to 10% of the cost of energy-saving improvements installed in their home.
- Eligible students may be able to claim a tuition and fees “above the line” deduction for qualified higher education expenses. The amount of the deduction is dependent on adjusted gross income.
Permanently Extended Tax Benefits
- The American Opportunity Tax Credit for certain tuition and related expenses for eligible students is now permanent. Credit can be phased in based on modified adjusted gross income.
- The optional itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes is permanent. This deduction is beneficial for residents of states with no state income tax and taxpayers who make large ticket purchases such as vehicles or boats.
- The provision for tax-free distributions from an IRA to charities is now permanent. This allows an individual 70 ½ and older to make a qualified distribution of up to $100,000 from an IRA to a charity. These distributions count as part or all of a required minimum distribution and the portion that applies to the RMD is excluded from gross income.
- The maximum Section 179 deduction for qualified business property is now permanently set at $500,000.
Items of Importance for 2015
- Long-Term Capital Gains Rates – The long-term capital gains tax rate for taxpayers in the top 39.6 bracket (taxable income over $464,850 for married filing joint taxpayers) is 20%. However, many people don’t know that the long-term capital gains tax rate for taxpayers in the 25-35% brackets is 15% and for those taxpayers in the two lowest tax brackets, the long-term capital gains rate is 0%. Long-term is defined as capital assets held for over 1 year.
- Net Investment Income Tax – as a part of the Affordable Health Care Act, many capital gains can be subject to an additional tax of 3.8% as required by the new health care law. There are income limitations for this provision.
- Higher Roth Contribution Income Limits – while the Roth IRA contribution limit remained unchanged at $5,500 per person (individuals age 50 or older may contribute $6,500), the income threshold for making a Roth IRA contribution has increased. The income threshold for eligibility begins phase out at $183,000 for married taxpayers ($116,000 for single taxpayers) and is totally phased out at $193,000.
Other Items of Importance for 2016
- 401k – Maximum Retirement Plan Contributions – the maximum amount that you can defer into your employer’s retirement plan remains at $18,000. Please note that if you are over 50 years of age, you are eligible for the catch-up provision of $6,000. This allows a total deferral of $24,000 if you are over 50.
- Annual Gift Tax Exclusion – the annual exclusion remains at $14,000 per recipient for 2016.
- Social Security Wage Base – The limit of wages subject to social security tax remains at $118,500 for 2016.
- Estate Tax Exclusion – the amount of taxable estate that will be exempt from estate tax is increased to $5,450,000.
The above is a summary of what hopefully will be relevant tax and financial topics that might apply to you and your family. We don’t expect significant modifications to the tax system in 2016 due to the pending election; however, as you well know there could be significant changes in the coming years. We advise our tax clients to set a long-term tax and planning strategy based on the current rules and regulations and modify as needed. Unfortunately, it is very difficult to predict what will happen in these areas, and it will greatly depend on the results of the 2016 elections.
It is an understatement to say our tax system is complicated and cumbersome. So many of the items above have specific applicability based on your personal situation. You should consult your tax advisor regarding these topics and how they may apply to your specific circumstances. We wish you a safe and prosperous year.