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Three Tips to Start the Tax Filing Season

  • Check whether your children need to file a 2015 tax return. They’ll need to file if wages exceeded $6,300, self-employment income was over $400, or investment income exceeded $1,050. When income includes both wages and investment income, other thresholds apply.
  • Consider whether you’ll contribute to a Roth or traditional IRA. Since you have until April 18 to make a 2015 contribution (April 19 if you live in Maine or Massachusetts), you can schedule an amount to set aside from each paycheck for the next few months. The maximum contribution for 2015 is the lesser of your earned income for the year or $5,500 ($6,500 when you’re age 50 or older). Be sure to tell your bank or other trustee that these 2016 contributions are for 2015 until you reach the 2015 limit. You can then deduct these 2016 amounts on your 2015 tax return for a quicker tax benefit.
  • Do you need to file a gift tax return? For 2015, you may need to file a return if you gave gifts totaling more than $14,000 to someone other than your spouse. Some gifts, such as direct payments of medical bills or tuition, are not subject to gift tax. Gift tax returns are due at the same time as your federal income tax return.

Call us for more tips on getting ready for filing your 2015 income taxes.

Congress renews tax breaks in year-end legislation

The Protecting Americans from Tax Hikes Act of 2015 was signed into law on December 18, 2015. The law renews a long list of tax breaks known as “extenders” that have been expiring on an annual basis.  This legislation makes some of the rules effective through December 31, 2016. Others are effective through 2019, and some are effective permanently. Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning now and in future years.

Here’s an overview of selected provisions.

  • The provision for tax-free distributions from IRAs to charities is now permanent. When you’re age 70½ and over, this break lets you make a qualified distribution of up to $100,000 from your IRA to a charity. The transfer counts as a required minimum distribution and is excluded from your gross income.
  • If you’re a homeowner, you can exclude mortgage debt cancellation or forgiveness of up to $2 million for 2015 and 2016. Discharges of qualified mortgage debt can also be excluded after January 1, 2017, if you have a binding written agreement in effect before that date. This tax break is only available for your principal residence.
  • If you or a family member is an eligible student, you may be able to claim a tuition and fees above-the-line deduction for qualified higher education expenses for 2015 and 2016. For 2015 tax returns, the maximum deduction is $4,000 when your adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers). The maximum deduction is $2,000 when your AGI is less than $80,000 ($160,000 for joint filers).
  • The deduction for up to $250 of out-of-pocket eligible educator expenses is now permanent. It will be indexed for inflation beginning with 2016 tax returns. You claim this deduction “above the line,” meaning it’s available even if you don’t itemize. If you do itemize, you can also generally claim qualified expenses above $250 as a deduction subject to a 2% of adjusted gross income limit.
  • The optional itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes is now permanent. This deduction is especially beneficial if you live in a state with no income tax. You may also benefit no matter where you live if you pay sales tax on a large ticket item such as an automobile, boat, or RV.
  • When you itemize, you can treat mortgage insurance premiums as deductible home mortgage interest in 2015 and 2016. The deduction is subject to phase-out based on adjusted gross income.
  • You may be able to claim a credit of 10% of the cost of energy-saving improvements installed in your home in 2015 and 2016, subject to a lifetime credit limit of $500.
  • The maximum Section 179 deduction for qualified business property, including off-the-shelf software, is now permanently set at $500,000 (subject to a taxable income limitation). That means you can immediately write off up to $500,000 of the cost of assets you purchased and placed in service during the year. The deduction is phased out above a $2 million threshold. Both thresholds will be indexed for inflation beginning in 2016.
  • You can treat qualified leasehold improvements, qualified retail improvements, and qualified restaurant property as Section 179 property subject to a first-year write-off limit of $250,000 for 2015. Modifications to the definition of certain real property that can be treated as Section 179 property, as well as limitations and the maximum amount available to such property, take effect after 2015. In addition, the thresholds will be indexed for inflation beginning in 2016.
  • The additional first-year depreciation deduction, known as “bonus depreciation,” is generally extended through 2019 when you buy qualified business property. The deduction is subject to a phase-out beginning in 2018 of 10% per calendar year, but you can deduct up to 50% of the cost of qualified property for 2015 through 2017. You can claim this deduction in conjunction with Section 179.
  • The business research and development (R & D) tax credit is made permanent. The law permits eligible small businesses to claim the credit against AMT liability beginning in 2016.
  • The work opportunity tax credit is extended for five years (through 2019) when you hire eligible individuals. The credit is also expanded to include qualified long-term unemployment recipients who begin work after December 31, 2015.

The remaining extenders range from such things as enhanced deductions for donating land for conservation purposes to tax credits for energy-efficient new homes.

The Protecting Americans from Tax Hikes Act of 2015 also makes changes to 529 college savings plans, such as including the purchase of computers and related services in the definition of qualified higher education expenses. The law modifies tax-free ABLE accounts for disabled individuals to allow flexibility in choosing a state program, as well as rollovers of amounts from 529 college savings plans to these accounts. The law also delays for two years the “Cadillac tax” on high cost health care plans.

Because the Act was passed so late in the year, it will be important for you to review your 2015 transactions to take advantage of applicable breaks in order to claim them on your 2015 federal income tax return. Also, with the rules now extended through 2016 (and in some cases beyond), you can begin to update your current tax plan with some measure of certainty.

Contact us for more information and for help determining which changes affect you.

Making an IRA Change Could Be Tax-Smart

Did you convert all or part of a retirement account to a Roth during 2014? And do you now wish you hadn’t? Here’s some good news: You have until October 15, 2015, to change your mind, even if you already filed your federal income tax return. Read more