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“Last minute” year-end 2015 tax-saving moves for individuals

Although there are only three weeks left to go before the year ends, it’s not too late to implement some planning moves that can improve a client’s tax situation for 2015 and beyond. This Practice Alert reviews some actions that clients can take before Dec. 31 to improve their overall tax picture.

RIA observation: Taxpayers and their advisers engaged in year-end tax planning for 2015 are once again challenged by the uncertain fate of “extender legislation.” In past years, a number of “temporary” tax rules, i.e., those having a termination date specified in the Code, have been routinely extended for one or two years. This year, Congress has yet to act on a host of important provisions that expired at the end of 2014. These include the election to claim sales and use taxes as an itemized deduction instead of state income taxes; qualified charitable contribution deductions for those age 70-1/2 and older; and the above-the-line deduction for qualified higher education expenses. The planning moves below apply whether or not there is legislation to extend those temporary rules through 2015.

Make HSA contributions. Under Code Sec. 223(b)(8)(A), a calendar year taxpayer who is an eligible individual under the health savings account (HSA) rules for December 2015, is treated as having been an eligible individual for the entire year. Thus, an individual who first became eligible on, for example, Dec. 1, 2015, may then make a full year’s deductible-above-the-line contribution for 2015. If he makes that maximum contribution, he gets a deduction of $3,300 for individual coverage and $6,550 for family coverage (those age 55 or older also get an additional $1,000 catch-up amount).

References: See FTC 2d/FIN ¶  H-1350  et seq.; United States Tax Reporter ¶  2234; TaxDesk ¶  289,100  et seq.; TG ¶  7650.

Nail down losses on stock while substantially preserving one’s investment position. A taxpayer may have experienced paper losses on stock in a particular company or industry in which he wants to keep an investment. He may be able to realize his losses on the shares for tax purposes and still retain the same, or approximately the same, investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them. There are several ways this can be done. For example, an individual can sell the original holding, then buy back the same securities at least 31 days later.

References: See FTC 2d/FIN ¶  I-3900  et seq.; United States Tax Reporter ¶  10,914; TaxDesk ¶  227,000  et seq.; TG ¶  10325.

Accelerate deductible contributions. Individuals should keep in mind that charitable contributions and medical expenses are deductible when charged to their credit card accounts (e.g., in 2015) rather than when they pay the card company (e.g., in 2015).

References: See FTC 2d/FIN ¶  G-2436; United States Tax Reporter ¶  4614.01; TaxDesk ¶  441,407; TG ¶  6162.

Solve an underpayment of estimated tax problem. Because of the additional .9% Medicare tax and/or the 3.8% surtax on unearned income, more individuals may be facing a penalty for underpayment of estimated tax than in prior years. An employed individual who is facing a penalty for underpayment of estimated tax as a result of either of these new taxes or for any other reason should consider asking his employer—if it’s not too late to do so—to increase income tax withholding before year-end. Generally, income tax withheld by an employer from an employee’s wages or salary is treated as paid in equal amounts on each of the four estimated tax installment due dates. Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

Retirement plan distribution. An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if he is facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution at a 20% rate and will be applied toward the taxes owed for 2015. He can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.

References: See FTC 2d/FIN ¶  S-5248; United States Tax Reporter ¶  66,544.02; TaxDesk ¶  571,342.

Be sure to take required minimum distributions (RMDs). Taxpayers who have reached age 70- 1/2 should be sure to take their 2015 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70- 1/2 in 2015 can delay the first required distribution to 2016. However, taxpayers who take the deferral route will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016.

References: See FTC 2d/FIN ¶  H-8275.1  et seq.; United States Tax Reporter ¶  4014.153; TaxDesk ¶  144,301  et seq.; TG ¶  8116.

Make year-end gifts. A person can give any other person up to $14,000 for 2015 without incurring any gift tax. The annual exclusion amount increases to $28,000 per donee if the donor’s spouse consents to gift-splitting. Annual exclusion gifts take the amount of the gift and future appreciation in the value of the gift out of the donor’s estate, and shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

A gift by check to a noncharitable donee is considered to be a completed gift for gift and estate tax purposes on the earlier of:

1. the date on which the donor has so parted with dominion and control under local law as to leave in the donor no power to change its disposition, or
2. the date on which the donee deposits the check (or cashes it against available funds of the donee) or presents the check for payment, if it is established that:
…the check was paid by the drawee bank when first presented to the drawee bank for payment;
…the donor was alive when the check was paid by the drawee bank;
…the donor intended to make a gift;
…delivery of the check by the donor was unconditional; and
…the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

Thus, for example, a $14,000 gift check given to and deposited by a grandson on Dec. 31, 2015 is treated as a completed gift for 2015 even though the check doesn’t clear until 2016 (assuming the donor is still alive when the check is paid by the drawee bank).

References: See FTC 2d/FIN ¶  Q-1916; TaxDesk ¶  711,005; TG ¶  40607.

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