Newsletter 2015
Newsletter 2015
Tax Update
Tax Update
Print Full ArticleLast Reviewed: Jan 2016
Last Modified: Jan 2016
There were remarkably few changes made to our tax laws this year. In keeping with the very poor practices of prior years, Congress did not address what we call the "extender legislation" until the last half of December. This means we learned a week ago which major elements of the tax code will be applicable to the 2015 tax year (that is not a typo!).
One thing the 2015 legislative session got right was to make certain tax savings provision we have come to rely on permanent. In prior years these provisions were just extended for another year (hence the name "extender legislation"). Here is a list of the provisions that apply commonly to our clients which were made permanent: The ability to direct up to $100,000 from your IRA to charity tax free; the option to deduct state sales tax on Schedule A; the $250 above-the-line deduction for teacher supplies; the research and development credit; the generous Section 179 equipment expensing provisions (now with a $500,000 annual cap); and the American Opportunity tuition credit.
Some other tax breaks were extended as follows: 50% bonus depreciation is extended through 2017 and will then fall to 40% in 2018 and 30% in 2019; the exclusion of up to $2 million of personal residence debt forgiveness as income is extended for 2015 and 2016, as is the tuition and fees deduction. Solar system and other energy credits were also extended through 2022.
Computer purchases are now allowed as a tax free distribution from a 529 college savings plan.
Penalties under the Affordable Care Act for not having insurance have ratcheted up for 2015. For each taxpayer and dependent claimed on a return the penalty will be the greater of a fixed dollar amount or 2% of income (after some adjustments). The fixed dollar amount and likely the minimum penalty for 2015 will be $325 for each uninsured family member reported on the return. The penalties will be much, much higher for 2016, so everyone that can afford it should be getting insurance. Those that cannot afford it can apply for an exemption based upon their income level and the cost of insurance in their area, and there are other exemptions available as well. If you have a modest household income, the credits available through the insurance exchanges can be very generous, so we encourage anyone without coverage to apply on the federal or state exchange available in your area. You must file your application before January 31 to purchase insurance through one of the exchanges.
Here is a reminder that for partnership and S-corporation returns, no adjustment is allowed for health insurance premiums paid for owners that are used as an above the line deduction on their 1040. We refer to this deduction as the self-employed health insurance deduction. The same rules apply to the deduction for ½ of any self-employment tax paid by owners. The justification for disallowing this adjustment is that they are not expenses of the partnership or S-corporation. Here is some good news on the local tax front, though: Partnerships can deduct from net taxable income unreimbursed expenses paid by the partners individually. An election to do this must be made each year. Don't worry about these rules if you file Schedule C, as all these expenses are already available to reduce your net income.
On the subject of business owner health insurance deductions, the uncertainty continues over whether a reimbursement arrangement for this insurance cost violates Affordable Care Act provisions that impose a $100 per day penalty (no typo here). IRS had previously created transitional rules that allowed these arrangements to continue through 2015, and according to available sources this transitional relief will continue until IRS issues "further guidance." With potential penalties this high, we like to make sure our clients are on absolutely sound footing and we are not so sure this bandaid approach by IRS provides it. But for now it is all we have to work with. One source feels a good solution is to simply add the insurance reimbursement amount to officer wages and deduct it like normal wages without taking the special self-employed health insurance deduction. The only problem with this is that the SE health insurance deduction is worth quite a bit of money on most of the returns that use it. So, we are still faced with much uncertainty on what to do for our clients using this deduction. As soon as we know more, you'll know more.
We have a new due date for one of the foreign asset reporting forms. Beginning with this filing season Form 114 is due April 15 instead of June 30. For the first time an extension is available for this form with a due date of October 15.
We have not seen an Oregon income tax kicker in a few years, but apparently state revenue exceeded expenses by enough in 2014 to trigger an automatic return of a portion of those monies. You can find out how much your kicker will be on the Oregon Department of Revenue's website. The formula for calculating it is your 2014 tax liability before credits (but after the credit for taxes paid to another state) multiplied by 5.6 percent. For most of us it is just 5.6% of the Oregon tax we paid last year (Line 32 of Form 40). Unfortunately, they will not be sending checks as was done in the past. We will claim the kicker amount as a credit on the 2015 tax return.
The federal gift and estate tax exemption amount will be $5,450,000 for deaths in 2016. This means spouses can together shelter $10,900,000 from estate tax. Using both exemption amounts is easier than it used to be under our relatively new "portability" rules that basically provide an automatic election to preserve the first spouse to die's exemption amount. A new rule for 2016 requires that executors filing a Form 706 (the federal estate tax reporting form) must give the estate's heirs notice of the adjusted basis in inherited assets. Assets usually receive an upward basis adjustment that is equal to their fair market value on the date of death. This will reduce or eliminate gain on the sale of inherited assets. The adjustment can be downward as well when an asset has depreciated. This adjustment will reduce or eliminate the losses available from the disposition of an inherited asset. Knowing the correct basis in inherited assets is obviously important so the added burden this notice creates is worth shouldering. The gift tax exclusion amount remains at $14,000 for 2016. Oregon's estate tax exemption amount remains at $1,000,000. The very generous pre-death gift planning we have discussed in prior Newsletters also remains available and can be used to eliminate not only any tax due, but the filing requirement as well.
