Tax Planning 2015 – Hot Topics

The 2015 essential tax and wealth planning

Tax planning for business and individuals is more focused on your specific fact pattern and objectives than the tax increases we saw in 2013 — rather than focusing on issues related to changing income tax rates, you will likely focus on managing tax on income when it is realized and enhancing the benefit of deductions and exclusions.

Income tax planning is important. By implementing a long-term commitment to thoughtful tax planning, you can better navigate today’s increased rate environment. Think about planning considerations in terms of categories of income, and also in terms of categories of tax. This approach can provide a solid foundation on which to focus your planning options.

Recently enacted tax law changes affecting individuals

Income tax rates. ATRA permanently left in place the six individual income taxbrackets ranging from 10% to 35% for unmarried taxpayers earning taxable incomeat or below $400,000 and married taxpayers earning taxable income at or below$450,000. For taxpayers earning annual taxable income above these thresholds,however, there is an additional bracket of 39.6%, equal to the top marginal rate in effect prior to 2001. As you can see from the Income Tax Rate Grid on page 24 the income thresholds are indexed annually for inflation, using the Consumer PriceIndex (CPI).

The top tax rate on income from qualified dividends and long-term capital gains was similarly changed under ATRA relative to 2012 law. The top rate on income from both sources increased to 20% (up from 15%) for unmarried taxpayers with income over $400,000 and married taxpayers with income over $450,000. The 15% rate for bothlong-term capital gains and qualified dividends has remained in place for taxpayerswith annual income below those thresholds.

PEP and Pease limitations. ATRA permanently reinstated the personal exemption phase-out (PEP) and limitation on itemized deductions (Pease) for single taxpayers with AGI above $250,000 and joint filers with AGI over $300,000, with the thresholds indexed annually for inflation. ATRA also permanently repealed PEP and the Pease limitations for taxpayers earning annual income below those thresholds.

Healthcare taxes

In addition to giving thought to income taxes and AMT, taxpayers also need to be mindful of the combined impact of healthcare taxes, which target earned and investment income of high-income taxpayers.

Medicare Hospital Insurance (HI) Tax. The top individual income tax rate of 39.6% in 2014 does not include the rate increases included in the Reconciliation Act. Rather, an additional 0.9% HI tax will apply to earnings of self-employed individuals or wages of an employee received in excess of $200,000 ($250,000 if filing jointly). Self-employed individuals will not be permitted to deduct any portion of the additional tax. If a self-employed individual also has wage income, then the threshold above which the additional tax is imposed will be reduced by the amount of wages taken into account in determining the taxpayer’s liability.

Net investment income tax. An additional 3.8% NIIT also will be imposed on unearned income (income not earned from a trade or business and income subject to the passive activity rules) such as interest, dividends, capital gains, annuities, royalties, rents, and income from businesses in which the taxpayer does not actively participate. Because the tax applies to “gross income” from these sources, income that is excluded from gross income, such as tax-exempt interest, will not be taxed. The tax is applied against the lesser of the taxpayer’s net investment income (after investment related and allowable deductions) or modified AGI in excess of the threshold amounts. These thresholds are set at $200,000 for single filers and $250,000 for joint filers. Some types of income are exempt from the tax, including income from businesses in which the taxpayer actively participates, gains from the disposition of certain active partnerships and S corporations, distributions from qualified plans and IRAs, and any item taken into account in determining self-employment income. For estates and trusts, the NIIT applies on the lesser of the undistributed net investment income, or the excess of AGI over the dollar amounts at which the 39.6% tax bracket for estates and trusts will begin. This threshold is $12,150 in 2014. Because this threshold is so low, consideration should be given to distributing income to beneficiaries who may be in lower effective tax brackets.

Charitable contributions or donations

must take the form of money or property, and do not include a taxpayer’s time or services. A donation in the form of cash (or checkor credit card charge) is considered a donation of money, the value of which is your total out of pocket cost. A taxpayer’s donation of property (for example, household goods, clothing, and motor vehicles) is generally measured by the fair market value of the property donated, with certain exceptions discussed below. Donated clothing and household goods must be in good condition. The IRS has discretionary power to disallow the deduction based on condition. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, objects of art, jewelry and gems, and collections are excluded from the provision and are subject to different rules.

When making donations, one must be mindful of the recordkeeping requirements for sustaining a charitable income tax deduction. For a monetary gift of any amount, either a written record (such as a credit card statement or cancelled check) or a written contemporaneous acknowledgement from the charity is required. For donations of $250 or more, a written acknowledgment from the charity is required, stating the amount of any benefits received in return for the donation. If no benefits were received, the acknowledgment must say so. When property other than cash, inventory, and publicly traded securities is donated to charity, and such property is valued above $5,000, the property must be appraised and summarized on the donor’s income tax return in order to claim a charitable deduction. If the value exceeds $500,000, the appraisal must be attached to the donor’s income tax return, whether the donor is an individual, partnership, or corporation.

The lifetime gift tax exclusion

In addition to the $14,000 annual exclusion (and the $145,000 annual exclusion for a noncitizen spouse), every individual taxpayer can transfer a certain amount of property during his or her lifetime without paying gift tax. The amount of property that can pass tax-free is referred to as the applicable exclusion amount. The applicable exclusion amount is used to calculate the credit available to offset the gift tax calculated for current-year transfers. The applicable exclusion amount for 2014 is $5.34 million. For 2014, the top marginal gift tax rate is 40%, which is applicable to gifts in excess of $1,000,000. Taking into account the applicable exclusion amount and the current rate structure, the applicable credit amount for 2014 is $2,081,800.

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