YEAR END TAX PLANNING TUESDAY, DECEMBER 8, 2015 PRESENTED BY: JOE CAWLEY, CPA, PRINCIPAL-JOECAWLEY@BSSF.COM JOHN WEIDMAN, CPA, PRINCIPAL-JOHNWEIDMAN@BSSF.COM PHONE NUMBER-(717)761-7171 1 THE AGENDA Part I: Individual Planning Issues Part II: Retirement Planning Issues Part III: Business Planning Issues Part IV: Affordable Care Act Update Part V: Estate Planning and Tax Deferral Strategies 2 1
PART I: INDIVIDUAL PLANNING ISSUES 3 2015: NO NEW TAX BRACKETS! RATE SINGLE MARRIED (JOINT) HEAD OF HOUSEHOLD 10% $0 $9,225 $0 $18,450 $0 $13,150 15% $9,226 $37,450 $18,451 $74,900 $13,151 $50,200 25% $37,451 $90,750 $74,901 $151,200 $50,201 $129,600 28% $90,751 $189,300 $151,201 $230,450 $129,601 $209,850 33% $189,301 $411,500 $230,451 $411,500 $209,851 $411,500 35% $411,501 $413,200 $411,501 $464,850 $411,501 $439,000 39.6% $413,201 and up $464,851 and up $439,001 and up 4 2
DIVIDEND AND CAPITAL GAINS RATES UNCHANGED The top tax bracket for dividends and capital gains is 20% (23.8% if net investment income applies). Here s the breakdown: 0% for taxpayers in 0 15% tax brackets 15% for taxpayers in middle-income tax brackets 20% for taxpayers in the highest tax bracket (39.6%) 5 LONG TERM CAPITAL GAIN RATES The long term capital gain rate is 20% if the taxpayer s taxable income exceeds $464,851 for a married couple filing jointly or $413,201 for a single filer (marginal rate of 39.6%). The tax rate on dividends is also 20% for taxpayers in this tax bracket. 6 3
LONG TERM CAPITAL GAIN RATES The long-term capital gain rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer s marginal ordinaryincome rate TIP: If you have adult children in one of these tax brackets, consider transferring appreciated or dividend-producing assets to them so they can enjoy the 0% rate 7 QUICK REVIEW OF NET INVESTMENT INCOME TAX (NIIT) Additional 3.8% tax Affects individuals, estates and trusts with income above certain thresholds Capital gains, interest and dividends Rental and royalty income Medicare surcharge g of 0.9% may also apply to wages, compensation and self-employment income 4
NET INVESTMENT INCOME TAX (NIIT) 3.8% percent tax on net investment income when a taxpayer s modified adjusted gross income (MAGI) exceeds a threshold of $200,000 000 (single filer) or $250,000 000 (married filing jointly). The tax is on the lesser of the taxpayer s net investment income or the amount of the taxpayer s MAGI exceeds the threshold. Real estate that is rented at a profit to a related party is deemed to be a non-passive activity (self rental) and the profit is not subject to the NIIT. The taxpayer should look for ways that they can materially participate in an activity or elect to group certain activities to increase the amount of time that they spend in the grouped activities. Net investment income in a trust is also subject to this tax at significantly lower thresholds. 9 MEDICARE SURCHARGE A.9% surcharge applies to earned income where earned income is over $200,000 for a single filer or $250,000 for joint filers. The employer is required to withhold this surcharge when an employee reaches $200,000 of Medicare wages. The income thresholds are not indexed for inflation so it is likely that more taxpayers will become subject to this tax. 10 5
EDUCATION TAX CREDITS American Opportunity credit Covers 100% of first $2,000 of tuition and related expenses; 25% of next $2,000 of expenses Maximum credit is $2,500 per year for first four years of college Extended through 2017 Ratable phase-out's between $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers Lifetime Learning credit Up to $2,000 per tax return for college expenses beyond first four years Ratable phase-out's between $55,000 to $65,000 for single filers and $110,000 to $130,000 for joint filers 11 EDUCATION TAX CREDITS A dependent child with taxable income can elect to claim the credit even though the parents would otherwise lose the credit due to income limitations. The parents do not claim the child (personal exemptions are subject to phase out rules in 2015) while the child can file and claim the credit (limited to the lesser of the amount of the credit or the amount of income tax due-no REFUND OF EXCESS CREDIT). 12 6
SAVING FOR EDUCATION Section 529 college savings plans Plan assets grow tax-deferred Distributions used to pay qualified expenses are income-tax-free for federal & state t purposes 13 JUMPSTARTING A 529 PLAN To avoid gift taxes, limit contributions to $14,000 annual exclusion amount or use part of your lifetime gift tax exemption Front-load five years worth of annual exclusion gifts in one year per beneficiary $70,000 per beneficiary $140,000 per beneficiary with gift-splitting 14 7
PART II: RETIREMENT PLANNING ISSUES 15 2015 QUALIFIED RETIREMENT PLAN LIMITATIONS 401(k)/403(b): $18,000 + $6,000 for over 50 IRA: $5,500 + $1,000 for over 50 No changes for 2016! 16 8
IRA CONTRIBUTIONS Contributions to an IRA are due no later than April 15 th for the preceding year. Extending the return does not extend the contribution date. Remember, the taxpayer must have EARNED income equal to or greater than the amount of the annual contribution, including any amounts contributed for a non-working spouse. 17 2015 IRA ROLLOVER RULES A taxpayer may only do ONE nontaxable IRA rollover within a one-year period on an aggregate basis to all of a taxpayer s IRA s. Prior law allowed one rollover per year on an IRA-by-IRA basis. Direct trustee to trustee transfers are not subject to this limitation. A taxpayer has 60 days from the date of distribution to deposit the amount distributed into another qualifying retirement plan to ensure the rollover is nontaxable. 18 9
ROTH IRAS Qualified distributions are tax-free (held account for 5 years), but aren t required during your life (no RMD) Contributions don t reduce current-year taxable income Roth conversions Tax on conversion Tax-free distributions AGI limit on conversion eliminated Opportunity to establish Roth accounts for high income earners (including spousal IRA) 19 ROTH IRAS FORHIGH INCOME EARNERS This is a planning opportunity using non-deductible contributions to a traditional IRA. Current law allows a taxpayer to convert a traditional IRA into a Roth IRA and pay tax on the deferred income. Non-deductible contributions to a traditional IRA provide tax basis to the taxpayer. Upon conversion, the taxable income is the fair market value (FMV) of the IRA at conversion less the tax basis. With proper planning, a taxpayer can convert the traditional IRA when the FMV is close the tax basis. CAUTION: This strategy t does not provide the same tax benefit if the taxpayer has other traditional IRAs funded with pre-tax dollars. In this case, the taxable income calculation takes into account the deferred income and tax basis of the IRAs in the aggregate. 20 10
ROTH IRAS FOR TEENS 2015/2016 contribution limit Lesser of $5,500 or 100% of earned income, reduced by any traditional IRA contributions Contributions aren t deductible If child earns no more than $6,300 in 2015 and has no unearned income, he or she will pay zero federal income tax Provides gift opportunities for parents and grandparents 21 EXPIRED TAX BREAKS Deduction for state and local sales taxes Above-the-line deduction for certain expenses incurred by a grade K through 12 teacher, principal, etc. Above-the line deduction for qualified tuition and related expenses Non-taxable distribution of IRA funds directly to a charity in order to satisfy the required minimum distribution rules 22 11
LAST-MINUTE PLANNING TIPS Pre-pay deductible expenses before Dec. 31 Tuition due in Januaryar 4th quarter state estimates Harvest capital losses Maximizing retirement deferrals Gift appreciated stock Don t forget your flexible spending account (FSA) 23 PART III: BUSINESS PLANNING ISSUES 24 12
EMPLOYING YOUR CHILDREN Business owners can hire their kids and deduct their pay Children can earn $6,300 in 2015 and pay zero federal income tax Children can earn an additional $5,500 without paying tax if they contribute it to a traditional IRA Combine with annual gifting from parents or grandparents to fund Roth IRA Education credits for college bound students Keep in mind: Children must perform actual work and be paid in line with what you d pay nonfamily employees 25 CHANGES TO DEPRECIATION-RELATED TAX BREAKS Bonus depreciation The 50% bonus depreciation EXPIRED at the end of 2014. Section 179 expensing For 2015, you can expense up to $25,000 of qualifying assets acquired in 2015. The deduction begins to phase out dollar for dollar once fixed asset purchases during the year exceed $200,000. In 2014, the 179 deduction maximum was $500,000 with a $2 million phase out threshold. Accelerated depreciation The shortened recovery period of 15 years for qualified leasehold-improvement property and restaurant and retailimprovement property EXPIRED at the end of 2014. The depreciable life reverted back to 39 years for 2015. 26 13
VEHICLE-RELATED TAX BREAKS Purchases of new or used vehicles Listed Property or SUV (6,000 pound GVW) Depreciation limit for Listed Property was $3,160 for autos placed in service in 2015 Sec. 179 expensing of SUV up to $25,000 27 OTHER EXPIRED TAX BREAKS R&D (research & development) credit Energy efficient commercial building deduction Employment related credits-work Opportunity Credit Reduction in S corporation recognition period for built-in-gains tax 28 14
PART IV: AFFORDABLE CARE ACT UPDATES 29 INDIVIDUAL MANDATE Beginning in 2014, an individual who is not exempt must purchase health insurance that meets the minimum coverage requirement, qualify for an exemption or pay a penalty. Penalty exemptions apply in certain cases. Form 1095-A (Health Insurance Marketplace Statement) 15
EMPLOYER MANDATE For calendar year 2015, employers with 50 or more full time equivalent employees (FTEs) must begin to report on their workers and the coverage offered. (Applicable Large Employer) Determination of Employer Size INDIVIDUAL MANDATE REPORTING 6055 Individual Mandate Reporting Insurers required to provide individuals and the IRS with information about minimum essential coverage (MEC) to see if the individual satisfied his or her obligation under the Individual Mandate. Self-funded vs. Fully-insured: Self-funded groups will have to report Insurance company will have to report for fully insuredgroups. The Forms: Form 1094-B and 1095-B to the IRS Form 1095-B to the covered individuals 16
INDIVIDUAL MANDATE REPORTING Forms 1094-B and 1095-B These forms are utilized by health insurance issuers, self-insured group health plans that are NOT sponsored by applicable large employers and providers of government sponsored coverage. The 1094-B serves as the transmittal form for the 1095-B s that are given to each covered employee. 1094 B Form ( Transmittal Form) 1094-B FORM Due Date - On or before February 28 (March 31 if filed electronically) of the year following the calendar year of coverage Information Required Name, address, and employer identification number (EIN) of the provider Name and telephone number of the person to contact who is responsible for answering questions Total number of Forms 1095-B that are transmitted with Form 1094-B 17
1095-B FORM Due Date - on or before February 28 (March 31 if filed electronically) ll of the year following the calendar year of coverage To the responsible individual (primary insured, employee, former employee) on or before January 31 of the year following the calendar year in which minimum essential coverage is provided Name and Social Security Number is required for each covered individual including covered dependentsd EMPLOYER MANDATE REPORTING 6056 Employer Mandate Reporting Provide individuals and the IRS with information about the Employer s compliance: Offering MEC Minimum Value (Adequate Coverage) Affordability (9.56%) The Forms: 1094-C and 1095-C to the IRS 1095-C to Full-Time Employees All Applicable Large Employers have to report regardless of whether fully insured or selffunded! 18
EMPLOYER MANDATE REPORTING Forms 1094-C and 1095-C For calendar year 2015, employers with 50 plus FTEs need to complete 1094-C and 1095-C. 1094-C reports whether minimal essential coverage was provided and the number of FTEs by month. It also serves as the form for an employer with 50 to 99 FTEs to apply ppy for the 2015 transition relief from the mandate. Finally, it serves as the transmittal form to report the number of 1095-C s issued. 1094-C FORM 1094 C (Transmittal Form) Due Date - on or before February 28 (March 31 if filed electronically) of the year immediately following the calendar year for which the offer of coverage information is reported Information Required Four Parts: Applicable Large Employer Member Information Number of 1095-C s Filed and Transition Relief Election Offer of Coverage and Employee Counts (Monthly Full-Time and Monthly Total) Other ALE Members of Controlled/Aggregated ALE Group Each Member of the Controlled Group must report separately 19
1095-C FORM Forms 1095-C The Form 1095-C needs to be completed for each employee who was a full-time employee for any month of the calendar year. If the employer provides coverage through a self-insured health plan, then the 1095-C also needs to include the names of each individual, such as family members, who are enrolled in the self-insured plan. Employer required to report the offer of coverage and the employee s share of the premium for selfonly coverage. 1095-C FORM Due Date - On or before February 28 (March 31 if filed electronically) of the year immediately following the calendar year for which the offer of coverage information is reported An employer that files 250 or more Forms 1095-C must file electronically with the IRS To the employee On or before January 31 of the year following the calendar year for which the offer of coverage information is reported 20
SUMMARY REPORTING TIMELINE REPORT Section 6055 Statement to Employees (1095 B) DUE DATE 1/31 of each year (2/1/16) Section 6055 Report to IRS (1094 B) Section 6056 Statement to Employees (1095 C) 2/28 (or 3/31 if electronic) 1/31 of each year (2/1/16) Section 6056 Statement to IRS (1094 C) 2/28 (or 3/31 if electronic) *250 or more returns must file electronically 2015 Gunn Mowery SUMMARY WHO HAS TO REPORT? Under 50 Insured Under 50 Selffunded 50-99 Insured 50-99 Selffunded 100+ Insured 100+ Selffunded Form 1094-B IRC 6055 MEC Reporting Insurer Employer Insurer N/A Insurer N/A Form 1095-B IRC 6055 MEC Individual Statement Insurer Employer Insurer N/A Insurer N/A Under 50 Insured Under 50 Selffunded 50-99 Insured 50-99 Selffunded 100+ Insured 100+ Selffunded Form 1094-C IRC 6056 Employer Mandate Reporting N/A N/A Employer Employer Employer Employer Form 1095-C IRC 6056 Employer Mandate Reporting Employee Statement N/A N/A Employer Parts I & II Insurer Part III Employer Employer Parts I & II Insurer Part III Employer 2015 Gunn Mowery 21
PREMIUM REIMBURSEMENT PLANS Prior to 2014, employers were able to reimburse some or all of the cost of the employee s own individual (non-group) health insurance on a pre-tax basis. No longer eligible for pre-tax treatment and the arrangement Does not meet the requirements of an employer sponsored plan. All non-group health insurance premium reimbursements must be included in taxable wages. PREMIUM REIMBURSEMENT PLANS (CONTINUED) Subject to $100/Day excise tax Transition relief from tax through June 30, 2015 Pending legislation in Congress to provide permanent relief from excise tax 22
PART V: ESTATE PLANNING & TAX DEFERRAL STRATEGIES 45 ESTATE AND GIFT TAXES 2015 estate tax lifetime exemption: $5,430,000 000 Top rate is 40% 2015 gift tax annual exclusion: $14,000 46 23
ESTATE AND GIFT TAX EXCLUSION The amount is indexed for inflation For married couples, the unused exclusion of a deceased spouse is portable and can be used by the surviving spouse if an election is made on the estate tax return filed on behalf of the deceased spouse. 47 PAY TUITION AND MEDICAL EXPENSES You may pay tuition and medical expenses for a loved one without the payment being treated as a taxable gift as long as the payment is made directly to the provider 48 24
TAX-SMART GIVING Consider estate and income tax effects of gifts To minimize your estate tax, gift property with greatest future appreciation potential To minimize i i your beneficiary s i income tax, gift property that hasn t appreciated significantly since you ve owned it To minimize your own income tax, sell property that has declined in value to take the tax loss and then gift the sale proceeds 49 QUESTIONS? 25
THANK YOU FOR ATTENDING! Please contact us for assistance: 717.761.7171 Camp Hill 717.581.1040 - Lancaster www.bssf.com 51 26