Dear Clients & Friends:
Happy New Year 2016! I hope you all enjoyed the holidays and were able to celebrate, relax, and spend time with loved ones. I look forward to touching base with each of you as we head into the tax new season. As we say goodbye to 2015, here’s a few things to keep in mind.
The Affordable Care Act. If you were not insured in 2015 for a total of 2 or more months, you may be subject to a penalty payable on your tax return. The annual fee for not having insurance during 2015 will be $325 per adult and $162.50 per child (up to $975 for a family), or 2% of your household income above the tax return filing threshold for your filing status—whichever is greater. For the 2016 tax year, the fee will increase to $695 per adult and $347.50 per child, or 2.5% of your household income above the filing threshold. To avoid such a penalty in 2016, sign up through your employer or the Healthcare Marketplace as soon as possible. If you purchased insurance for 2015 from a marketplace, you will receive an IRS Form 1095-A sometime in January 2016. Please be on the lookout for this form. It is necessary for the completion of your tax return. If you received the Advanced Premium Tax Credit in 2015, you can find that information on your Form 1095-A. You may receive a bigger tax credit or have to pay back some or all of the credit if your actual income is more or less than the amount you estimated at the time you purchased coverage from your marketplace.
On December 18th, Congress passed the Protecting Americans from Tax Hikes Act of 2015, and the president promptly signed the bill into law. The legislation resurrected numerous personal and business tax breaks that had expired at the end of 2014. Because Congress habitually allows these breaks to go off the books before inevitably restoring them for a year or two, they have become known as “the extenders”. They are back on the books for tax years 2015 and 2016, and some of them have even been made permanent.
Here’s a quick summary of how the resurrected breaks can affect your 2015 Federal income tax return:
If you will owe little or nothing for state and local income tax for 2015 and later years, you can choose to deduct state and local general sales taxes on your Federal return instead of deducting state and local income taxes. Specifically, you can deduct predetermined sales tax amounts from IRS tables based on where you live, unless you’ve kept receipts that support a bigger number. In addition, you can deduct actual sales tax amounts for major purchases such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an airplane, a home, or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle.
This provision extends a tax deduction for qualified higher education expenses. If you are not eligible for the American Opportunity and Lifetime Learning tax credit, Congress has just renewed a ruling to cover eligible education expenses paid in 2015 and 2016. This ruling allows you to claim a limited deduction for tuition and related fees. Depending on your income, the maximum write-off is either $4,000 or $2,000. Eligible expenses include tuition, mandatory enrollment fees, and course materials including books and supplies.
Under this now-permanently-restored break, you can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA(s) for the tax year if you were 70 1/2 or older as of Dec. 31, 2015. Direct-from-your-IRA donations are called qualified charitable distributions, or QCDs. They are tax-free and no deductions are allowed for them, so QCDs do not directly affect your tax bill. However, this type of charitable donation does count as a withdrawal for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70 1/2.
For Federal income tax purposes, if you sell your principal home for less than what you owe the bank—or if your home is foreclosed—the lending bank may agree to forgive the remaining debt you owe. The IRS typically treats forgiven debt as taxable income to you. Under this provision, up to $2 million of cancellation of debt (COD) income from such canceled principal residence acquisition debt can be treated as a tax-free item.
The $250 deduction for teachers and other K-12 educators for school-related expenses paid out of their own pockets has been made permanent. It now covers eligible expenses up to $250 spent in 2015 and beyond.
In recent years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. This break expired at the end of 2014, but the law has been reinstated for tax years 2015 and 2016. However, the $500 cap on the credit is reduced by any credit that you claimed in a pre-2015 year.
Plus, the two most important resurrected breaks for small businesses:
The Section 179 deduction allows the cost of qualifying new and used depreciable assets (including most software) to be fully written off in Year One. For assets placed in service in tax years beginning in 2015 and beyond, the new law maintains the maximum Section 179 deduction allowance at the generous figure of $500,000 (same as for the last few years). For post-2015 years, the $500,000 cap will be indexed for inflation.
For tax years beginning in 2015, Section 179 deductions can also be claimed for up to $250,000 of qualifying real property expenditures. For 2016 and beyond the $250,000 cap on real property expenditures is eliminated. However, deductions allowed for real property expenditures reduce the overall $500,000 Section 179 deduction cap.
The new law allows 50% first-year bonus depreciation for qualifying new (not used) business assets that are placed in service in calendar years 2015-2017. This break combined with the Section 179 deduction can lead to big tax savings for small and medium-size businesses.
Standard Deduction Amounts
Income Subject to Top Tax Rate
For 2015, the amount of income subject to the highest tax rate of 39.6% is as follows:
As of the 2015 tax year, you can make only one rollover from one IRA to another IRA in any twelve-month period, regardless of the number of IRAs you won. The rollover amount limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for the purposes of the limit. However, trustee-to-trustee transfers between IRAs are not limited, and rollovers from traditional to Roth IRAs (“conversions”) are not limited.
Finally, these are some additional miscellaneous items to consider:
Please be aware, the IRS has issued new consumer alerts providing taxpayers with tips to protect themselves from tax scams across the country. The IRS will never call about taxes owed without first mailing a bill to the taxpayer. Likewise, the New York State Department of Taxation and Finance will never send you an email asking you to validate personal information, such as your username, password, or account numbers. More information about what to lookout for can be found here:https://www.irs.gov/uac/Newsroom/IRS-Completes-the-Dirty-Dozen-Tax-Scams-for-2015.
And one final reminder, if you have 4th quarter 2015 tax estimates to pay, the due date is January 15, 2016.
Please call or email me if you have any questions concerning this memo. As always, I look forward to providing my assistance. Again, Happy Holidays and Happy New Year.
Charles A. Kerner, CPA