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A. GET THE INFORMATION YOU NEED TO MAKE A DECISION ON HEALTH INSURANCE COVERAGE FOR 2016.
The Affordable Care Act levies penalties on individuals who do not have health insurance coverage. The penalty
for 2016 is 2.5% of your Modified Adjusted Gross Income or $695/adult plus $347.50/child, whichever is
- Determine whether your existing coverage is renewable for 2016.
- Check for changes from 2015:
- Health Savings Account options
- Coinsurance percentages
- In network
- Out of network
- Go to healthcare.gov and get the same information for 2016 policies.
- Talk to your healthcare providers and find out if they are in-network for specific policies.
Check your history of medical expenses.
An important factor in your policy choices is your expected annual medical expenses. If the amount
is low, you should consider a high deductible paired with a HSA contribution. If your medical
expenses are high and recurring, you would lean towards a low deductible policy.
- Estimate your 2016 medical expenses, and classify for each policy.
- In network
- Out of network
B. IF YOUR CURRENT HEALTHCARE COVERAGE HAS BEEN CANCELLED, APPLY FOR A NEW POLICY.
You cannot activate a policy at any time. You must get this done during the open enrollment period which
begins on November 1, 2015. Here are the application submission dates and the dates of effective coverage
Submission Date – Date of Coverage
To 12/15/2015 – 1/1/2016
12/16/2015 – 1/15/2016 2/1/2016
1/16/2016 – 2/15/2016 3/1/2016
Open enrollment ends on 1/31/2016. Individual states may set their own enrollment periods, but absent state
action, the federal guidelines are in effect by default.
The only exception to open enrollment requirements are for “qualifying events.”
- Loss of essential coverage (such as from loss of employment)
- Change in family structure (marriage, divorce, etc.)
- A move to a new location
- When a child covered under a family plan turns 26
If you don’t act during the open enrollment period, you will have to buy a short-term policy. If you don’t like
the pricing in the public risk pools, it’s likely that you will like the cost of short-term policies even less.
C. HEALTH INSURANCE DOCUMENTATION
The Affordable Care Act imposed increased tax reporting requirements on individuals, employers, and
insurance companies. Individuals who don’t have healthcare coverage may be subject to a penalty. For 2015 it
is the greater of 2% of Modified Adjusted Gross Income (up to the cost of bronze level coverage) or $325/adult
The ACA contemplates that reporting of healthcare coverage will become a regular part of individual income
tax returns, as if there wasn’t enough in the returns already. In 2015, insurance companies and employers will
report coverage with monthly coverage details on new forms 1095-B and 1095-C.
- When gathering your 2015 tax documents make sure to obtain form 1095-A, 1095-B, or 1095-C.
- There may be multiple policies, and coverage may not be uniform throughout the year.
D. YEAR-END TAX SELLING
There is a graduated capital gains tax rate. Gains are taxed at:
- 0% if in the 10% or 15% federal brackets,
- 20% if in the highest federal bracket, and
- 15% for brackets in between
A 3.8% surtax on investment income is added on gains that are part of Adjusted Gross Income is excess of
$200,000 for a single filer, and $250,000 for joint filers. Add state income taxes, and the tax on capital gains can
A situation you want to avoid is paying tax on capital gains in 2015, but having non-deductible losses in 2016
because losses exceed gains. Taking capital losses to offset capital gains can also avoid the surtax on investment
- Review portfolios before year-end for tax selling opportunities.
- Look into spreading gains over two years to avoid the maximum 20% rate or 3.8% surtax.
- Take long-term gains if you are in the 0% or 15% tax bracket.
E. REPORTING FOREIGN BANK ACCOUNTS
Many taxpayers are accustomed to putting tax returns on a six month extension. Extending changes the due
date of individual income tax returns from April 18, 2016 to October 17, 2016. Reports of foreign bank
accounts (FBAR Form 114) are due by June 30th. There is no extension. These are required to be e-filed
separately from the e-filing of the individual return.
- Individuals with foreign bank accounts should download the tax organizer in January and fill out the
page related to FBAR reporting.
F. ILLINOIS TAX DEPOSITS
News flash…Illinois is desperate. They require that tax deposits equal 90% of the current year’s income tax
after credits or 100% of prior year’s tax.
- Review your Illinois tax estimate and discuss with us to see if making a fourth quarter estimated tax
deposit is necessary.
2015 Year End Tax Planning: Routine Follow-ups
1. REVIEW YOUR 2015 TAX ESTIMATES.
Update what 2015 will look like, and do the following:
- Estimate your marginal tax rates (income tax rate on the next dollar of income).
- Determine whether your wage or self-employment income will be above the FICA limit ($118,500 for 2015).
- Determine whether the Alternative Minimum Tax will apply.
2. DEVELOP STRATEGIES FOR TAKING 2015 DEDUCTIONS.
Know where additional deductions will produce little or no tax benefit.
- If your childcare expenses are already above the tax credit or salary reduction limits.
- If your rental losses are already blocked by the passive loss rules.
- If your losses or deductions will throw you into a 0%, 10%, or 15% tax bracket.
- If you won’t have enough deductions to itemize and instead will use the standard deduction (Single = $6,300; Married Filing Jointly = $12,600).
- If you don’t have more medical deductions than 10% of Adjusted Gross Income, or miscellaneous itemized deductions greater than 2% of Adjusted Gross Income.
If any of these situations exist, it may be preferable to delay taking the deduction until 2016.
3. LOOK FOR SITUATIONS WHERE TAKING INCOME IN 2015 WILL RESULT IN NO ADDITIONAL TAX BEING DUE.
- Realizing capital gains where you will have excess (non-deductible) capital losses.
- Realizing passive income where you have blocked passive losses.
- Realizing investment income where you have blocked investment interest deductions.
- Where you are in a zero or low (10% or 15%) income tax bracket.
- Making a Roth IRA conversion.
4. MAKE SURE THAT YOU ARE MAKING MAXIMUM USE OF THE FOLLOWING TAX BENEFITS:
- $3,000/year capital loss deduction allowance.
- $25,000 rental loss allowance for owners with active participation in the ownership and management of rental real estate. (Warning: This benefit is phased out as Adjusted Gross Income increases from $100,000 to $150,000.)
- $5,000 per year dependent care exclusion or the $3,000 per individual childcare expenses qualifying
for the child care tax credit (maximum $6,000).
- Deductible IRA contributions (Maximum $5,500 per individual). Individuals over age 50 are able
to make an additional “catch-up” contribution of $1,000. Non-working spouses may have deductible
IRA’s available if AGI tests are met. Note that deduction phase-out ranges are being increased annually
for individuals who have pension coverage. The AGI phase-out point for individuals with pension
coverage is $61,000 for single filers and $98,000 for joint filers with pension coverage. The phase-out
point for spouses without pension coverage starts at $183,000 of AGI when the other spouse has pension
- The Section 179 expensing allowance for personal property used in a trade or business. The
maximum deduction is $25,000 and the phase-out-threshold is $200,000 of asset additions. Off-the-shelf
software also qualifies for this allowance.
- The optional standard mileage reimbursement rate for 2015 is 57.5 cents per mile.
5. INDIVIDUALS SHOULD MAKE SURE THAT TAX DEPOSITS ARE ADEQUATE.
- To avoid underpayment penalties, your total withholding plus estimated tax deposits must exceed the
lesser of: (a) 2014’s tax or (b) 90% of your eventual 2015 tax.
- Don’t forget to review estimated taxes for your children, unless they are under 19 (or under 24 if they
are full-time students) and you intend to include their income on your return. (This inclusion is only
allowed where the child has only interest and dividend income, and in total it is less than $10,000.)
- If your Adjusted Gross Income for the year is above $150,000, you will avoid underpayment
penalties if you deposit 110% of 2014’s tax. Taxpayers with incomes up to $150,000 can avoid
penalties by depositing 100% of the prior year’s tax as noted above.
6. REVIEW YOUR TAX BASIS IN PARTNERSHIPS AND S-CORPORATIONS
- Losses from S-corporations can be non-deductible if a shareholder does not have tax basis in either
the stock or debt of the company. Partnership losses can be limited if losses allocated exceed the
taxpayer’s basis in the partnership.
- Partners and shareholders of these entities that are projected to have pass-through losses should
review their basis in the investment to make sure that the desired amount of loss will, in fact, be
deductible. Making additional investments before year-end to increase basis may be necessary to
make this happen.
7. PAY ATTENTION TO FINANCIAL HOUSEKEEPING.
- If you are married to a foreign national, make sure your spouse has an ITIN (Individual Tax
Identification Number). E-filing is not allowed without one.
- Apply for Social Security numbers for dependents.
- Change Social Security name records for name changes due to marriage or divorce. (Note: Names
used on tax returns must agree exactly to the spelling used by the Social Security Administration,
including the use of abbreviations and initials.)
- Obtain documentation for charitable contributions. Gifts of $250 or more must be substantiated by a
written acknowledgment from the donee organization.
- Obtain appraisals for non-cash contributions exceeding $5,000.
- Get auto usage records compiled. Businesses should make sure that the personal use value of
company autos is included in the employee’s W-2.
- Make sure that documentation for entertainment expenses is adequate to withstand an IRS audit.
Do not dispose of the year’s appointment book if you intend to rely on it to support business deductions.
- Get taxpayer ID numbers for 1099 and W-2 recipients (including daycare providers) by having them
complete Form W-9.
- Document participation in business activities if you feel that this may be an issue in applying the
passive loss rules. The general cutoff point for material participation is 500 hours per year. The cutoff
for participation as a Qualified Real Estate Professional is 750 hours.
- Update your tax basis records for investments, especially for mutual funds with dividend
reinvestment. Also update basis records for improvements done to real estate.
- If you have received any gifts of investment property during the year, ask the donor for the
carryover basis information.
- Get business activities segregated into separate bank accounts for 2016.
- If your deductions will change radically in 2016, be sure to adjust your withholding accordingly
using Form W-4.
- Shareholders who have advanced money to their incorporated businesses should evidence the
transaction with a note and should charge an adequate rate of interest.
- The value of health insurance paid on behalf of 2%+ S corporation shareholders should be included in
W-2 totals as wages.
- Clean out the basement!!!! Financial records that relate to tax years more than three years prior can
generally be disposed. (The big exception relates to the cost of assets. Keep asset basis records for as
long as you own the property).
8. REVIEW 2016 BENEFIT PLAN OPTIONS WITH YOUR EMPLOYER.
- 401(k) plan contribution rate and investment choices. (Don’t forget to elect the bonus contributions if you’re 50 or older.)
- Non-qualified deferred compensation plan elections.
- Dependent care salary reductions.
- Compensation paid in the form of mass transit passes. (Note: This tax provision is scheduled to expire after 2014, but has been extended previously.)
- Medical reimbursement plan salary reductions.
- Health insurance deductible options
- Health savings account contributions
- Flex spending account contributions
Having health insurance coverage with a high deductible policy entitles you to make contributions to a Health
Savings Account (HSA). Minimum qualifying policy deductibles are $1,300 for single coverage or $2,600
for family coverage. The maximum HSA contribution is $3,350 for single coverage (or $6,750 for family
coverage). Bonus contributions of $1,000 will be allowed for those individuals age 55 or more. Individuals
eligible for Medicare cannot make HSA contributions.
The maximum annual contribution limit for a flex spending account is $2,550. Participants can carry over
up to $500 in unspent contributions if the plan has not adopted the 2.5 month grace period rule. (This allows
2.5 months after year-end to spend unused funds.) The $500 carryover will not reduce the current year’s FSA
contribution. Caution: Taking advantage of the carryover rule will prevent HSA contributions.
- If you plan on making HSA contributions for 2016, clear out the flex spending account before yearend.
9. DISCUSS CHANGES TO EXPENSE REIMBURSEMENT ARRANGEMENTS WITH YOUR EMPLOYER BEFORE YEAR-END.
- Expense allowance arrangements where actual business expenses are not reported to the employer
are not considered to be qualified expense reimbursement arrangements. Instances where the employee
documents expenses to the employer, but is not required to return excess reimbursements are also not
qualified reimbursement arrangements. All of these expenses are taken as itemized deductions subject to
a 2% of Adjusted Gross Income floor before they become deductible.
- Taxpayers should discuss changing to qualified reimbursement arrangements.
10. ZERO OUT PERSONAL SERVICE CORPORATION INCOME WITH EXPENSE PAYMENTS AND BONUSES AT YEAR END.
- When taxable income is retained in a Personal Service Corporation (PSC), it is subject to a 35%
income tax. Corporations that have not elected S status must zero out income to avoid this tax.
11. RESTRUCTURE YOUR DEBTS WHERE POSSIBLE TO ENSURE DEDUCTIBILITY AND REDUCE FINANCIAL RISK.
- Replace consumer debt with either home equity debt or business debt. Replace passive activity debt
with home equity debt if passive activity losses are limited.
- Lock in fixed rates.
12. S-CORPORATION OWNER/EMPLOYEES SHOULD REVIEW HOW THEIR COMPENSATION IS SPLIT BETWEEN SALARY AND DIVIDENDS.
- S-Corporations can avoid some payroll taxes by paying out income to shareholder employees in
the form of dividends instead of salary. However, the formalities of setting salary levels and declaring
dividends should be strictly observed to avoid potential reclassification by the IRS.
13. MAKE SURE THAT ALL INVESTMENT ACCOUNTS HAVE A PROPER SOCIAL SECURITY NUMBER AND ARE NOT SUBJECT TO BACKUP WITHHOLDING.
- The backup withholding rate is 28%. The existence of backup withholding can cause the filing of a
child’s individual return, instead of simply having the parents include the income on their tax return.
14. C-CORPORATIONS THAT PLAN TO RETAIN EARNINGS SHOULD MAKE ESTIMATED TAX DEPOSITS EVEN IF NO TAX WAS INCURRED IN 2015.
- Underpayment penalties are usually avoided if a taxpayer at least matches the prior year’s tax with
estimated tax payments. This penalty exception does not apply if a corporation has no tax liability in the
15. IF YOU MAINTAIN AN IRREVOCABLE LIFE INSURANCE TRUST, MAKE SURE THAT CRUMMEY POWER DOCUMENTATION IS KEPT IN YOUR FILE AND IS UP TO DATE.
- In the absence of this documentation, the IRS can apply the transfer of funds to the trust against your
unified estate and gift tax credit.