Year-End Strategies: Leveraging Traditional Techniques And New Developments

Year-end tax planning for individuals and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments. Individuals and businesses need to question the status quo, explore new strategies, and evaluate potential plans – most of which is done best before the current tax year closes. Year-end tax planning for individuals and businesses is results driven and many developments in 2015 can contribute to a year-end strategy that delivers the greatest value.


As in past years, tax legislation – or the lack of tax legislation –is an essential consideration in year-end planning. At the time this briefing was prepared, a host of individual and business tax extenders had not yet been renewed by Congress for 2015. Comprehensive tax reform continues to be discussed in Washington, but as year-end approaches it is almost certain that no major changes will be made to the Tax Code. Some stand-alone bills, discussed below, and the expected passage of the extenders, may provide year-end planning opportunities.


As in past years, traditional year-end income shifting techniques may be valuable. Taking inventory of income and expenses to calculate whether strategies to accelerate or defer one or the other, before the current tax year closes, should be employed as applicable at year-end 2015 as it has been in the past. Assessing current gains and losses, to map out a year-end buy, sell or hold strategy later makes particular sense as markets continue to make adjustments.

Income And Capital Gains/ Dividends

For individuals, the income tax rates for 2015 are unchanged from 2014: 10, 15, 25, 28, 33, 35 and 39.6 percent (although the start of each bracket continues to be inflation-adjusted upward each year). The tax rates for qualified (net long-term) capital gains and dividends, which are keyed to the general income tax brackets, are also unchanged for 2015, ranging from 20 percent for those in the 39.6 percent income tax bracket, down to 15 percent for those within the 25 to 35 percent brackets, and to zero percent for those otherwise in the 10 or 15 percent income tax brackets.


Spikes in income, whether capital gains or other income, may push capital gains into either the top 39.6 percent bracket (for short-term gains) or the 20 percent capital gains bracket. Spreading the recognition of certain income between 2015 and 2016 may help minimize the total tax paid for the 2015 and 2016 tax years. Likewise, those individuals finding themselves in the 15 or 10 percent tax brackets should consider recognizing any long-term capital gain available to the extent that, with other anticipated income, will not exceed the top of the 15 percent bracket ($74,900 for joint filers and $37,450 for singles in 2015).


Another strategy for some taxpayers might be to look for a short-term investment (bonds, etc.) payable into next year, intended to defer the receipt of taxable income from 2015 to 2016. The taxpayer would not recognize income on such investments until the maturity date of the investment in 2016.


Marital status (single, married or divorced) for the entire tax year is determined on December 31. Because of varying income tax brackets depending upon filing status, a marriage penalty or a marriage benefit may result for any particular couple. As a general rule, if each partner has income approximately in the same amount of the other, they will pay more in combined tax filing a married, joint return rather than as two single individuals. Accelerating or postponing marriage or divorce at year end might be considered based upon this difference in tax brackets.

Net Investment Income Tax

Since creation of the NII tax, individuals have learned that NII encompasses more than capital gains and dividends. NII includes income from a business in which the taxpayer is a passive participant. Rental income may also be considered NII unless earned by a real estate professional. The NII threshold amount is equal to: $250,000 in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. These threshold amounts are not indexed for inflation.


If possible, keeping modified adjusted gross income (MAGI) below the thresholds is an avenue to explore. Spreading income out over a number of years or offsetting the income with above-the-line deductions are possible approaches. Again, spikes in income should be carefully managed.


The NII tax is separate from the Additional Medicare Tax. Individuals who anticipate liability for Additional Medicare Tax may request that their employer(s) take out an additional amount of income tax withholding before year end. This additional amount will be applied against taxes shown on the taxpayer’s individual income tax return, including any Additional Medicare Tax liability, and help prevent any estimated tax shortfall.

Alternative Minimum Tax

For 2015, the AMT exemption amounts are $53,600 for single individuals and heads of household; $83,400 for married couples filing a joint return and surviving spouses; and $41,700 for married couples filing separate returns.


No single factor automatically triggers AMT liability, but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures; itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from uninstallment sales. Investments, especially in oil and gas, may also generate “tax preferences” that may add up to AMT liability.

Pease Limitation/Personal Exemption Phaseout

For 2015, the Pease limitation threshold is $309,900 for married couples and surviving spouses; $284,050 for heads of households; $258,250 for unmarried taxpayers; and $154,950 for married taxpayers filing separately. The threshold adjusted gross income amounts for the personal exemption phaseout (PEP) are the same as the threshold amounts for the Pease limitation.


Potential reduction of the value of certain itemized deductions and personal exemptions may be lessened by some individuals by managing adjusted gross income as well as affected itemized deductions. For purposes of the limitation on itemized deduction, a taxpayer’s total, itemized deductions do not include deductions for medical expenses, investment interest expenses, casualty or theft losses, and allowable wagering losses.

Same-Sex Marriage

In Obergefell, 2015-1 ustc ¶50,357, the U.S. Supreme Court held that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex. Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state. Obergefell was not a tax case, but the Supreme Court’s decision will impact married same-sex couples not only with return filing but in other areas, such as employee benefits and health care.

Tax Extenders For Individuals

Under current law, a number of popular but temporary tax incentives are not available for 2015 unless extended by Congress. For individuals, these include the state and local sales tax deduction, the higher education tuition and fees deduction, a mortgage debt forgiveness exclusion, the teachers’ classroom expense deduction and the Code Sec. 25C residential energy property credit.

Child Tax Credit

The Trade Preferences Act of 2015 places new limits on the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. These taxpayers will not be able to claim the refundable portion of the child tax credit for the tax year.

Estate And Gift Taxes

The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5 million exclusion for gifts made and estates of decedents dying after December 31, 2012. The annual gift tax exclusion allows taxpayers to give up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts), gift-tax free and without counting the amount of the gift toward the lifetime $5 million exclusion, adjusted for inflation.


The $14,000 ($28,000) annual exclusion is a use-it or lose-it benefit; it resets each January 1st but cannot be then retroactively taken for the prior year. The applicable exclusion amount, as adjusted for inflation, is $5,430,000 for gifts made and estates of decedents dying in 2015. This exclusion jumps to $10.86 million when spouses combine exclusions.

Expatriate Gifts

The IRS issued proposed regulations under the Heroes Earnings Assistance and Relief Tax Act of 2008 that apply to transfers of property from individuals who have abandoned U.S. citizenship or residency and who later make a gift or bequest (a “covered” transfer) to a U.S. taxpayer (either an individual or a domestic trust).


An individual cannot escape the tax by making transfers before a certain deadline. The tax itself has applied since 2008.

Year-End Retirement Planning – Employer Plans

One of the first steps for retirement savings is to contribute to an employer-sponsored elective salary deferral plan (particularly to the extent of an employer match). These salary deferral plans include 401(k) plans, 403(b) plans, and 457 plans (depending on the type of employment).


For 2015, the inflation-adjusted elective salary deferral limit for 401(k), 403(b) and 457 plans is the lesser of $18,000 or 100 percent of compensation. If an employer makes contributions, the total contribution for the 2015 year from both the employee and the employer is capped at $53,000 (not including an additional $6,000 for catch-up contributions). Plans rules vary on the extent to which ability to increase contributions at year-end.


myRAs might be viewed as “starter IRAs” in that they cap out at $15,000 (or 30 years, whatever comes first). The account follows all the other tax rules associated with regular Roth IRAs. However, myRAs have no fees and can be opened for as little as $25 through payroll direct deposit. The account balance will never go down in value and the security in the account, like U.S. savings bonds and other Treasury securities, is guaranteed. It is open to anyone who has an annual income currently of less than $129,000 a year for individuals and $191,000 for couples; but only through an employer, whose participation is not mandatory.