2014 Year-End Tax Planning Guide: 2015 Preview

Moss Adams LLP writes: On October 30, 2014, the IRS issued its cost-of-living adjustments for 2015. In a nutshell, with inflation remaining in check, many amounts will increase only slightly, and some will stay at 2014 levels. Adjustments relate to individual income taxes, the alternative minimum tax, education- and child-related tax breaks, retirement plans, and gift and estate taxes. As you implement your 2014 year-end tax planning strategies, be sure to take these 2015 adjustments into account. Being aware of the changes now may guide the financial moves you make (or don’t make) in the new year.

INDIVIDUAL INCOME TAXES

Tax brackets will widen and personal exemptions will increase slightly for 2015.

Tax-bracket thresholds increase for each filing status, but because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top threshold for the 10 percent bracket increases by $150 to $300 depending on filing status, but the top threshold for the 35 percent bracket increases by $3,625 to $7,250, again, depending on filing status.

The personal and dependency exemption increases by only $50 (to $4,000) for 2015 and is subject to a phaseout. The 2015 phaseout reduces these exemptions by 2 percent for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (or, for single filers, by 2 percent of each $1,250).

For 2015 the phaseout starting points increase by between $2,425 and $4,850, making the starting AGI thresholds $258,250 (for singles), $284,050 (for heads of household), $309,900 (for joint filers), and $154,950 (for separate filers). The exemption phases out completely at $380,750 (for singles), $406,550 (for heads of households), $432,400 (for joint filers), and $216,200 (for separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3 percent of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80 percent of otherwise allowable deductions). For 2015 the thresholds are $309,900 for joint filers (up from $305,050), $284,050 for heads of household (up from $279,650), $258,250 for singles (up from $254,200), and $154,950 for separate filers (up from $152,525).

ALTERNATIVE MINIMUM TAX

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others, and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT instead.

As with the ordinary tax brackets, the AMT brackets are annually indexed for inflation. For 2015, the threshold for the 28 percent bracket increased by $2,900 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2015 are $53,600 for singles and heads of households and $83,400 for joint filers—increases of $800 and $1,300, respectively, over 2014 amounts. The inflation-adjusted phaseout ranges for 2015 are $119,200–$333,600 (for singles and heads of households) and $158,900–$492,500 (for joint filers). Amounts for separate filers are half those for joint filers.

EDUCATION- AND CHILD-RELATED TAX BREAKS

The maximum benefits of various education- and child-related breaks generally remain the same for 2015. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGI is within the applicable phaseout range are eligible for a partial break; breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2015, depending on the break. For example:

• The American Opportunity Tax Credit. The MAGI phaseout ranges remain the same for 2015: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers. This education credit delivers a maximum benefit of $2,500 per eligible student.
• The Lifetime Learning Credit. The MAGI phaseout ranges increase for 2015; they’re $110,000–$130,000 for joint filers and $55,000–$65,000 for other filers. This education credit delivers a maximum benefit of up $2,000 for joint filers and $1,000 for others.
• The adoption credit. The MAGI phaseout ranges for this credit also increase in 2015 to $201,010–$241,010 for joint, head-of-household, and single filers (a $3,130 increase). The maximum credit increases by $210, to $13,400 for 2015.

Note that married couples filing separately generally aren’t eligible for these credits.

These are only a few of the education- and child-related breaks that may benefit you. Keep in mind that if your MAGI is too high for you to qualify for a break for your child’s education, your child might still be eligible.

RETIREMENT PLANS

Many retirement-plan-related limits increase slightly in 2015; thus, you may have opportunities to increase your contributions and your retirement savings:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2015.

Traditional IRAs

MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan.

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2015 phaseout range limits are $98,000–$118,000 (a $2,000 increase).
  • For a spouse who doesn’t participate, the 2015 phaseout range limits are $183,000–$193,000 (also a $2,000 increase).
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2015 phaseout range limits are $61,000–$71,000 (a $1,000 increase from 2014).

Taxpayers with MAGI within the applicable range can deduct a partial contribution; those with MAGI exceeding the applicable range can’t deduct any IRA contributions. But a taxpayer whose deduction is reduced or eliminated can still make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs

Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2015 phaseout range limits are $183,000–$193,000 (a $2,000 increase).
• For single and head-of-household taxpayers, the 2015 phaseout range limits are $116,000–$131,000 (also a $2,000 increase).

You can make a partial contribution if your MAGI falls within the applicable range, but you can’t make any contribution if it exceeds the top of the range. Note that married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.

GIFT AND ESTATE TAXES

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2015 the amount is $5.43 million (up from $5.34 million for 2014).

The annual gift tax exclusion remains at $14,000 for 2015. It’s adjusted only in $1,000 increments, so it typically increases only every few years. It increased to $14,000 in 2013, so it might go up again for 2016.