With the holidays just around the corner, it is time, once again, to start your year-end tax planning. And like so many years in the recent past, we are once again waiting on Congress to pass the tax extenders bill to know what many of the most common 2015 tax provisions will be.
What we do know is the 2015 tax rates and tax brackets for individuals are very similar to 2014. The IRS just released the 2016 rates and brackets, which are very similar to the 2015 because of the past year’s low inflation. Since the tax rates and brackets have been pretty consistent from year to year, there isn’t a great incentive to accelerate or defer income or deductions this year due to changing tax rates. The old rule of thumb still applies:
- Try to accelerate deductions into the current year and defer income into next year. Some ways to accomplish this is to maximize deductible retirement plan contributions such as 401(k) or deductible IRAs this year.
- With the recent downturn in the stock market, you may consider selling some losing positions in order to offset capital gains or take advantage of the $3,000 of capital losses individuals can take to offset ordinary income.
- Accelerate itemized deductions such as medical expenses, state and local income tax payments, real estate tax payments or charitable contributions into the current year. Before making large itemized deduction payments you should consult with your tax advisor to make sure the payments do not trigger the Alternative Minimum Tax (AMT).
For businesses, year-end planning is a bit murkier. The popular deductions and credits such as bonus depreciation, research tax credit and Work Opportunity Tax credit all expired at the end of 2014. While it is expected these provisions, along with about 50 others, will be retroactively reinstated before the end of the year, we currently don’t have any timeline as to when. In recent years, the tax extenders bill has been rushed through Congress just before (or shortly after) the end of the year. However, Congress has been known to make small tweaks to some of the provisions. It is possible something could change or be dropped altogether. An example is the popular section 179 deduction for purchases of equipment. The maximum deduction for 2014 was $500,000 but the current maximum is $25,000. This provision will also likely be updated in the tax extenders bill but it may be in an amount different from the $500,000 maximum for 2014.
While there is still much uncertainty regarding Federal tax planning, Ohio’s tax situation is much clearer. The Ohio General Assembly passed the bi-annual budget this past June reducing income taxes for individuals and small business owners. The budget bill included a 6.3 percent across the board rate decrease reducing, for example, the top individual tax rate from 5.333 percent to 4.997 percent. Small business owners of pass through entities will see further tax reduction as well. Small business owners will be able to take advantage of the 75 percent of the first $250,000 of Ohio sourced pass through income exemption for 2015 and will be able to take a 100 percent exemption for such income in 2016. In addition, the business income exceeding the exemption amount will now be limited to a maximum three percent income tax rate instead of the normal graduated tax rates.
Before making any big year-end planning moves, it is always a good idea to consult with your tax advisors to make sure the ideas suggested above make sense given your specific tax circumstances. As always, please feel free to contact us at Ciuni & Panichi, Inc. if you have any questions.
David Reape is a Principal in the firm’s Tax Department. He has experience in all facets of taxation for individuals and closely-held businesses, along with their owners and key personnel. His clients are in a wide range of industries, including not-for-profit, manufacturing, service, restaurants, and health care.
Visit cp-advisors.com to learn more.