2015 Year-End Tax Planning Tips
Year-end is often the most opportune time to consider financial and tax planning strategies. The Jewish Community Foundation can help you maximize the value of your year-end charitable giving. We are available to work with you and your advisors to ensure that you and our community can receive the full benefit of your generosity.
2015 Tax Rates
The top individual income tax rate remains at 39.6 percent for families with taxable income over $464,850, and $413,200 for individuals. Keep in mind that this top rate can go higher due to the phase-out of itemized deductions which reduces the benefit of certain deductions – including mortgage interest or state and local taxes. “High-income taxpayers” pay an additional 3.8 percent Medicare tax on investment income, such as capital gains, in excess of $250,000 for married taxpayers and $200,000 for individuals. An additional 0.9 percent tax is imposed on wage income above these thresholds. Because the top tax rates can range well over 40 percent, certain strategies to defer income and accelerate deductions may be more important than ever for many taxpayers before year-end.
Shift income and deductions where possible
Tried and true year-end tax strategies generally revolve around shifting some tax burden to a future year. Deferring receipt of a bonus payment to 2016, accelerating deductions into 2015 by prepaying a deductible expense, and making larger charitable gifts all can lower this year’s tax bill. Remember that you need to factor in the alternative minimum tax to determine if shifting income and deduction strategies provide maximum savings in your financial situation.
Recognizing Investment Gains and Losses
The stock market has taken a bit of a roller-coaster ride this year, but stock prices have been generally rising again in the fourth quarter. It is a smart strategy to review your investment portfolio before year-end. Timing the recognition of capital gains and losses for long term (owned more than one year) and short-term assets can help smooth the impact of market fluctuations experienced this year. And because the top capital gains tax rate can now reach 23.8 percent when you factor in the health care surtax, it may pay to consider charitable giving strategies to avoid the capital gains taxes. Consider donating appreciated stock to create a donor advised fund (“DAF”) at the Jewish Community Foundation or adding such securities to an existing DAF. Remember, however, if the current value of the stock is below your cost basis, it usually makes sense to sell the stock first, recognize the tax loss, and then gift the proceeds to charity.
Estate and Gift Strategies to Consider
There has been a bit more certainty in the estate and gift tax laws over the past several years, as top rates and portability of the per spouse exemption remain in place. Gifts of up to $14,000 per spouse, per recipient remain gift-tax free and are not counted against the estate and gift tax exemption. In some circumstances, you may still want to consider making large gifts or transferring appreciated property to intended beneficiaries before year-end. Other gifting and estate planning strategies to consider include gifts in trust, and other more complex transfer transactions. Both your tax adviser and planned giving professional can help here.
Charitable Giving at Year-End
Accelerating or increasing charitable contributions is among the most effective strategies to reduce taxes and get financial support into the hands of your favorite charity sooner. Some year-end points to remember: (1) gifts by check are considered complete this year as long as they are dated and mailed by December 31, even if the charity doesn’t cash the check until January, (2) pledges and other obligations cannot be deducted unless actually paid by December 31, (3) if you haven’t decided which organizations you ultimately want to support, but you want to increase your deduction for charitable contributions this year, this is a perfect use for a donor advised fund at the Jewish Community Foundation, and (4) contributions made by credit card here (whether to support the Foundation or a specific JCF Fund) are deductible this year, so long as you complete the transaction by midnight on December 31.
Giving Techniques and Interest Rates
Many other techniques deserve special consideration, while interest rates remain historically low. A charitable lead trust – a planning vehicle where the trust pays income to a charity for a period of years and then transfers trust property to others – can provide a current charitable gift and reduce federal transfer tax. Grantor retained annuity trusts should also be considered to shift appreciating assets to others at little or no gift tax. Intra-family loans to children or family members also can be attractive, as long as IRS interest rates remain substantially lower than commercial interest rates.
IRA Charitable Rollover
Since 2006, many people over age 70½ have used the IRA Charitable Rollover to transfer up to $100,000 each year from their retirement accounts directly to public charities, like the Jewish Community Foundation. With the IRA Charitable Rollover, a transfer is made directly from your IRA to the Jewish Community Foundation. The amount transferred is credited against your required minimum distribution, and is withdrawn from your IRA tax-free. IRA Charitable Rollovers can be used to support the Foundation generally, or to create or add to existing permanent endowment funds. (The IRA Charitable Rollover rules do not permit contribution to donor advised funds, but ordinary contributions from your IRA to a DAF are permitted and are fully tax-deductible.) Because of the interaction of the IRA Charitable Rollover and the IRA required minimum distribution rules, if you are considering a rollover of retirement funds to charity, it is advisable to contact the Foundation before taking action. Important note: The IRA Charitable Rollover expired at the end of last year and, as this is written, Congress has not yet acted to renew the provision for 2015. However, there is a strong expectation that it will be re-enacted retroactively to the beginning of 2015, just as was done in December 2014.
Arizona Tax Credits
Arizona taxpayers can receive a dollar-for-dollar tax credit for donations supporting public school extracurricular activities, Private School Tuition Organizations, Qualifying Charitable Organizations (formerly the “working poor” tax credit), Qualifying Foster Care Organizations, and the Arizona Military Family Relief Fund. Different amounts can be claimed as credits for each of the donations, so contact your tax advisor or the Arizona Department of Revenue for details.