MAKING THE MISSION POSSIBLE:
UNCOVERING THE LATEST YEAR-END TAX
PLANNING STRATEGIES
MARTIN S. FINN, CPA, JD, LL.M.
LAVELLE & FINN, LLP
MARTY@LAVELLEANDFINN.COM
WWW.LAVELLEANDFINN.COM
Making the Mission Possible:
Uncovering the Latest Year-End Tax Planning Strategies
I.
Legislative Update
A.
Federal
1.
Tax Rates for 2015 (Exhibit A)
a)
Top Ordinary Income Tax Rate - 39.6%
b)
Capital Gains/Dividends Rate - 0% (10% and 15% brackets), 15%
(25%, 28%, 33% and 35% brackets) or 20%
c)
Alternative Minimum Tax Rate (“AMT”) - 26%/28%
d)
Medicare Surcharge -
e)
(1)
Net Investment Income Tax (“NIIT”) - 3.8%
(2)
Additional Medicare Wage Surcharge - 0.9%
2016 Inflation Adjustments Issued - Rev. Proc. 2015-53, 201544 IRB 1 (21 October 2015)
2.
Surface Transportation and Veterans Health Care Choice Improvement
Act of 2015 (“Highway Trust Fund” Act) - 7/31/15
a)
Mortgage reporting requirements - after 2016 lender must
report outstanding principal, mortgage origination date and
address or description of mortgaged property
b)
6-year statute of limitations if basis overstated
c)
Tax return due dates (effective for taxable years beginning
after 12/31/15) (1)
Partnership returns - 3/15 with 6 month extension
available
(2)
Fiduciary Returns - 4/15 with 5 ½ month extension
available
(3)
“C” Corporations - 4/15 with 5 month extension
available
d)
Basis consistency (1)
Generally, beneficiary’s basis received from a decedent
must be consistent with the value of the asset reported
on the estate tax return
(a)
Executor
has
reporting
responsibilities
to
beneficiaries
(b)
3.
Effective date postponed to 2/29/16
Same-Sex Marriages
a)
After Windsor and Obergefell, same-sex married couples now
considered legally married for federal and state tax filing
purposes
(1)
Consider benefits of filing amended joint income tax
returns for open tax years
(2)
Also consider filing amended estate and gift tax returns
to take into account marital deduction
b)
IRS issued proposed regulations on October 21, 2015
implementing these decisions and confirming that the federal
tax code provisions relating to marriage should be interpreted
to include same-sex spouses as well as opposite-sex spouses.
4.
Status of Tax Extenders Bill?
a)
Nothing yet
(1)
Senate Finance Committee approved a two-year
extension in July
b)
“Extenders” at risk (1)
State and local sales tax deduction
(2)
Tuition and fees deduction
(3)
Educator’s expenses
(4)
COD income - mortgage debt
(5)
Mortgage insurance premium deduction
-2-
B.
(6)
Charitable contribution of IRA
(7)
Energy efficiency tax provisions
(8)
Expanded Section 179 deduction
(9)
Special “bonus” depreciation
(10)
Qualified small business stock gain exclusion
Tax Provisions in NYS FY 2015-16 Budget
1.
No major income tax changes
2.
Extends for 2 years the charitable deduction limitation for individuals
with AGI of more than $1 million and less than $10 million (50% of
Federal deduction) and for individuals with AGI of more than $10
million (25% of Federal deduction)
3.
Estate tax technical corrections
a)
On October 27, 2015, the New York State Department of
Taxation and Finance issued a Technical Memorandum (“TSB”)
that provides estate tax guidance for residents and for
nonresidents owning New York property. Specifically, the TSB
provides guidance on how to compute allowable deductions for
resident and nonresident estates, and examples to illustrate
the computations. TSB-M-15(4)M.
II.
Year End Planning Ideas
A.
Basic Concepts
1.
Know Your Tax Bracket - 2015 & 2016
a)
Consider AMT, NIIT and limitation on itemized deductions and
personal exemptions
2.
Time Value of Money
3.
Income Character - Ordinary v. Capital Gain
4.
Consider AMT applicability
5.
Need a good tax projection software
-3-
B.
Traditional Year End Planning
1.
Defer (Accelerate?) Income
a)
Year-end bonuses
(1)
b)
Availability of deferred compensation plan
Retirement plan distributions
(1)
Defer first year RMD
c)
Delay Roth conversions
d)
Defer billings and collections
e)
Postpone sale of appreciated assets, e.g., investment securities
and closely-held business interests, or consider installment sale
(1)
If sale is necessary, be sure to meet long-term holding
requirement to take advantage of lower capital gain
rates
f)
2.
Postpone US Savings Bonds redemption
Accelerate (Defer?) Deductions
a)
b)
Prepay bills (1)
Real estate taxes
(2)
Mortgage interest
(3)
State estimated tax payment
(4)
Charitable pledges
(5)
Business supplies
Bunch itemized deductions (1)
Medical expenses - 10% of AGI floor (7.5% for 65 and
older)
(a)
Health and long term care insurance premiums
(b)
Medical and dental services
(c)
Prescription drugs
(d)
Mileage (23 cents per mile)
-4-
(2)
c)
d)
Miscellaneous expenses - 2% of AGI floor
(a)
Professional fees
(b)
Tax planning and return preparation
(c)
Investment advice and fees
(d)
Unreimbursed business expenses
Charitable deductions (1)
Mail check before 12/31/15
(2)
Use credit card
(3)
Consider gift of appreciated securities
(a)
Avoid capital gain
(b)
Deduct FMV
(4)
Gift used clothing, books and furniture
(5)
Obtain appropriate documentation
Harvest capital losses before year end
(1)
Offset capital gains
(2)
Beware wash sale rule
(a)
Loss deferred if substantially identical security
purchased within 30 days before or after sale
(b)
Buy securities of a different company in the same
industry or in a mutual fund that invests in that
industry
(c)
Buy a bond of similar quality and duration from a
different issuer
(d)
Wait 31 days to sell after purchase or wait 31
days to repurchase after sale
(3)
Deduct excess capital losses at $3,000 per year clip
indefinitely
-5-
C.
NIIT Planning
1.
Imposes an additional 3.8% tax on net investment income of individual
taxpayers, estates and trusts with income in excess of certain
thresholds
a)
2.
Estate/trust threshold much lower than individual thresholds
Net investment income includes interest, dividends, capital gains,
rental and royalty income, non-qualified annuities and passive activity
income
3.
Planning options
a)
Monitor and document time spent on “business” activities to
avoid passive classification
(1)
Must be a material participant
(2)
Trusts can qualify for the real estate professional
exception to passive activity loss rules depending on
involvement of trustee
b)
Consider investment alternatives such as tax-exempt securities
and life insurance
c)
Make estate/trust distributions before year end to clear out
income
(1)
“65 Day” Rule - A trustee of a complex trust and an
executor of an estate can elect to treat distributions
made in the first 65 days of a tax year (Jan. 1 - Mar. 6, in
a non-leap year) as occurring in the prior tax year.
(a)
Avoid harsh fiduciary tax brackets
(b)
Push income back into tax year in which
beneficiary is in a lower tax bracket
(c)
D.
minimize or eliminate 3.8% NIIT
Retirement Plans
1.
Maximize current year tax-deferred contributions
-6-
a)
At a minimum, contribute amount necessary to obtain
employer match
2.
Consider Roth conversion
a)
Convert tax-deferred growth to tax-free growth
b)
No income-based limit but converted amount is taxable income
c)
Factors to consider:
d)
(1)
Age
(2)
Tax bracket changes - current and future years
(3)
Ability to pay tax from non-IRA funds
“Back door” Roth IRA
(1)
Non-deductible contribution to Traditional IRA and
convert to Roth
3.
Be sure to adopt new retirement plan for 2016 before year end where
necessary
E.
Business Planning
1.
Equipment purchases
a)
Monitor reinstatement of “bonus” depreciation deduction and
act accordingly before year end if it is extended
b)
Section 179 first year deduction allowed for up to $25,000 of
qualifying purchases - unless Congress reinstates $500,000
limit.
2.
Tangible property rules
a)
Understand final IRS regulations which are used to determine
whether certain expenditures related to tangible property are
currently deductible business expenses or depreciable capital
expenditures
(1)
Consider safe harbor elections for small businesses and
routine maintenance
-7-
3.
Consider cost segregation study for recently purchased, built or
remodeled business building
a)
Identifies components that can be currently expensed or
depreciated faster
4.
Conduct - and memorialize in writing - year end business meetings of
shareholders and directors
a)
Ratify tax planning decisions, e.g., bonuses, retirement plan
contributions, charitable contributions, accounting practices
b)
F.
Secure entity level liability protection
Miscellaneous Planning to Consider
1.
Health Savings Account (“HSA”)
a)
Contribute pre-tax income if covered by a qualified highdeductible health insurance policy
b)
$3,350 for self-only and $6,650 (2015)/$6,750(2016) for family
coverage
2.
Flexible Spending Account (“FSA”)
a)
Reimburses for qualified medical and dependent care expenses
b)
$2,550 (2015 & 2016)
c)
Check employer plan for $500 rollover and/or 2 ½ month grace
period
3.
Income Tax Payment Planning
a)
Adjust tax withholdings before year end if estimated tax
payments are not sufficient to avoid penalties
(1)
4.
Withholdings deemed paid ratably throughout year
Planning with Kids
a)
Consider transferring appreciated securities to adult child in 0%
capital gain rate
(1)
Beware the kiddie tax!
(2)
Can avoid 20% capital gain tax and 3.8% NIIT
-8-
b)
5.
Review State Residency Status
a)
III.
Hire your child and contribute to Traditional or ROTH IRA
Document days in and out of NYS
Don’t Forget Year End Estate Tax Reduction Planning
A.
Annual Exclusion Gifts (2015 & 2016 - $14,000)
1.
Pay tuition and medical expenses
B.
Stepped-up basis v. estate tax reduction
C.
Valuation discounts for intra-family transfers
1.
Constantly under attack
a)
President’s Budget Proposals
b)
IRS regulations
-9-
Exhibit A
The following charts are borrowed from the 2015 Thomson Reuters Checkpoint™ Tax
Planning for Individuals Quickfinder® Handbook.
- 10 -
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Martin S. Finn, CPA, JD, LL.M.
MARTIN S. FINN, an attorney and certified public accountant, is a founding
partner of the law firm Lavelle & Finn, LLP. Mr. Finn counsels clients on estate,
financial, tax, business and elder law issues including personal and corporate
tax planning, business counseling, structuring of business transactions, estate
administration and estate and business succession planning. A major part of his
practice involves assisting elderly clients and their families with tax and legal
issues such as maximizing wealth and retirement income, governmental
programs (e.g., Medicare and Medicaid) and disability planning including use of
durable powers of attorney, supplemental needs trusts, health care proxies and
living wills.
Martin S. Finn
marty@lavelleandfinn.com
29 British American Blvd.
Latham, New York 12110
T: (518) 869-6227
F: (518) 869-0572
188 Church Street
Saratoga Springs, NY 12866
T: (518) 584-6300
F: (518) 584-5673
Areas of Practice:
Trusts & Estates
Administration
Elder Law
Estate and Tax Planning
Mr. Finn holds a B.B.A. from Siena College (1980), a J.D. from Albany Law School
(1983) and an LL.M. in Taxation from New York University (1989). He is a
member of the American, New York State, Albany County and Schenectady
County Bar Associations; the National Academy of Elder Law Attorneys, Inc.; the
American Institute of Certified Public Accountants; and the New York State
Society of Certified Public Accountants.
Mr. Finn is a frequent lecturer and, with his partner John H. Lavelle, is co-author
of The Complete Trust Course (HalfMoon Education, Inc., 2014), Cents &
Sensibility: The Practical Guide to Money & Aging (iUniverse, 2006) and Estate
Planning Techniques for Mid-Sized Estates (PESI, 2005).
Mr. Finn is Steering Committee Chair and Conference Chair of the AICPA
Conference on Tax Strategies for the High-Income Individual; Conference Chair
of the 2015 AICPA Sophisticated Tax Conference; Member of the Board of
Directors and Treasurer of the Schenectady County Chamber Foundation;
Member of the Board of Managers of Capital Communications Federal Credit
Union; Member of the Board of Directors of the Schenectady County Industrial
Development Agency; Former Schenectady County Legislator (District 3), 20082013; Past Treasurer of Niskayuna Friends of Music; Past Member of the
WMHT Planned Giving Advisory Committee; Past Chair of the Chamber of
Schenectady County Board of Directors; Past President of the Board of
Directors of the Estate Planning Council of Eastern New York, Inc.; Past Member
of the Siena College Board of Associate Trustees (Planned Giving Advisory
Committee); and Past President of the Board of Directors and Member of the
Board of Trustees of the Northeastern New York Chapter of the Alzheimer’s
Association, Inc. He has also been an Adjunct Professor at Siena College, Albany
Law School and the University at Albany.
Mr. Finn is the 2005 recipient of the Fr. Benjamin Kuhn Award for his
contribution to Siena College, the 2001 recipient of the Schenectady County Bar
Association’s Lawyer in Service to the Community Award and the 1998 recipient
of Professional Education System, Inc.’s Excellence in Education Award.