New Consistent Basis Reporting Regulations Provide Clarity and Some Big Surprises

When a person dies, the income tax basis of property included in the person’s gross estate changes to its fair market value (FMV) at the date of death (or the alternative valuation date six months later if that is elected).  This provision is generally beneficial in two respects:  1) property generally increases in value over time, so the increase in basis eliminates the inherent capital gain for income tax purposes, and 2) cost records for property owned by the decedent are often unavailable.  However, property that is considered “income in respect of a decedent or IRD” has a basis of zero and does not receive a new basis at death. Examples of IRD property include traditional IRAs, qualified retirement plans, and earned or accrued income that was not received as of the date of death.

Some taxpayers have taken aggressive tax positions in order to reduce their income taxes, arguing that the FMV of the property they inherited was actually greater than the FMV used in the decedent’s estate tax return.  In response, on July 31, 2015, Congress enacted a basis consistency law and granted the IRS sweeping powers to carry out the intent of the law.  On March 4, 2016, the IRS published temporary and proposed regulations.

The executor of the estate must report the FMV of the property to the IRS on Form 8971 and to any person acquiring ownership in the property on Schedule A to Form 8971.  The report must be furnished the earlier of:  1) 30 days after the estate tax return due date (including extensions), or 2) 30 days after the filing of the estate tax return.  Any adjustment to the FMV must also be reported within 30 days of the adjustment.  Penalties apply to late or incomplete reporting, and also to any understatement of income tax from using a tax basis greater that the FMV as finally determined for the estate tax return.  The IRS has extended the due date to March 31, 2016 for all Forms 8971 that were due before then.

For the vast majority of estates, these reporting rules will not apply.  Reporting is required only if an estate tax return (Form 706) is required to be filed because the decedent’s gross estate (which includes prior taxable gifts) exceeds the basic exclusion amount, which is $5,450,000 in 2016.  Form 8971 is not required in the following situations:

·       Form 706 is filed only to make the portability election.

·       Form 706 is filed for the sole purpose of making an allocation or an election for purposes of the generation-skipping transfer tax.

·       A protective Form 706 is filed for an estate having a FMV of less than the basic exclusion amount in order to start the statute of limitations (SOL) against a potential IRS audit.

If Form 8971 is required to be filed, not every item included on the estate tax return has to be reported on Schedule A.  Exemptions are:

·       Cash and equivalents.

·       IRD assets.

·       Tangible personal property having a total value of $3,000 or less.

·       Property sold by the estate at a gain or loss.

Some big surprises in the regulations just published:

·       If the executor of the estate has not determined which specific property each beneficiary will receive, then each beneficiary must receive a report of all of the estate’s property that could be used to satisfy the beneficiary’s interest.  This requirement is sure to cause controversy among the beneficiaries when they see the size of the estate and the types of property that are available to them!  Most of the time the executor will not make distributions out of an estate until after receiving a “closing letter (or its current IRS equivalent)” to protect against any personal liability for additional estate tax from an IRS audit.

·       A so-called “zero basis rule” is introduced by the IRS, and seems contrary to well established tax law.  The IRS states that if property is discovered to have been left off of the estate tax return, and would have increased the estate tax if included, its income tax basis is zero no matter the FMV.  If the SOL has not expired on the estate tax return, then the executor can amend the return and add the overlooked asset and restore the tax basis.  If the SOL has expired, the basis is zero.

·       The zero basis rule also applies to an estate tax return that should have been filed but was not.  The basis of property is zero until the estate tax return is filed and final values are determined.  This means that assets sold, depreciated, etc. before then may have overstated basis deductions and tax penalties could result.  Thus a big exposure exists for estates having hard-to-value assets (e.g. a business interest) claiming valuation discounts, and where the gross estate FMV is less than the basic exclusion amount and no estate tax return is filed.  The IRS has a big incentive to challenge the valuation discounts to cause a requirement to file an estate tax return.  In this situation it will be prudent to file a protective estate tax return if increasing the asset’s value would cause or increase estate tax.

·       The new tax law requires basis consistency reporting of executors.  The IRS has now exercised its legislative authority to create a whole new category of people subject to the reporting requirements:  beneficiaries!  Heirs of an estate who in turn gift or otherwise transfer (other than by sale) property received from the estate to a related person or entity, must report the basis of the transferred property to both the IRS and the transferee by filing a Form 8971 within 30 days of the transfer.  There appears to be no time limit on this exposure to report, so in theory the requirement could apply to a transfer made many decades after the inheritance!

·       Some estate plans leave property to one beneficiary for a period of time (e.g. his or her lifetime) after which the property passes to another person (the contingent beneficiary).  The proposed regulations require that a supplemental basis report be provided when the property passes to the contingent beneficiary.  Since this can be many years into the future, one commentator has asked, “Will executors now have lifetime duties?”

Update:

On March 23, 2016, the IRS issued Notice 2016-27 which further extends the due date from March 31, 2016 to June 30, 2016.

 

New Federal Tax Audit Rules for Partnerships and LLCs May Require Amending Your Operating Agreements because of Potentially Serious Financial Implications

Partnerships and LLCs are “flow through” or “pass through” entities, meaning that the income tax associated with the entity’s taxable income is paid by the partners and members (the owners).  Current audit rules require the IRS to collect back taxes from the owners due to any increase in the entity’s taxable income.  Effective for tax years beginning after 2017 (although earlier application can be elected), the Bipartisan Budget Act of 2015 changes the rules regarding IRS audits of partnership and LLC tax returns.  The purpose of the new law is to make life easier for the IRS by permitting the IRS to collect back taxes from the entity instead of from the individual owners.  As such, the owners of the entity in the tax year the tax audit adjustments become final are the ones who bear the economic cost of any additional taxes associated with a prior year!  The highest tax rate will be used to calculate the back tax.  Regulations may permit owners in lower tax brackets to prove a lower rate to the IRS.  In that case, the operating agreement should address how to compensate the owner who lowered the entity’s back tax amount.  In addition, the new law has serious implications for the owners with respect to who has the authority to enter into binding audit agreements with the IRS. 

Since this new law affects the legal and economic relationships of the owners, you should consider working with your legal team to make any necessary changes to the operating agreement, such as requiring a withdrawing partner to indemnify the entity for back taxes and selecting the partnership audit representative.  Typically, the owners would want any tax burden associated with audit adjustments to be borne by the owners in proportion to their ownership interests in the tax year that was audited.  In addition, those now acquiring ownership interests should pay special attention to this change because the entity can elect earlier application of the new audit rules, and new members can be exposed to past tax problems if not otherwise dealt with in the operating agreement. 

There is an election out of the new audit rules for entities with 100 or fewer owners.  But to ensure that the election remains available, no LLC or partnership or trust should be permitted to become an owner of the entity, although C and S corporations and estate owners are permitted.  The number of S corporation shareholders are counted in whether the 100 owner test is met.  The election out must be made annually on a timely filed tax return.  This election should be addressed in the operating agreement. 

There is an exception to the entity paying the additional tax.  Within 45 days of the IRS’ notice of final adjustment, the entity may elect not to pay the tax and instead require the individual owners to pay the tax.  The entity apparently has to do the work in getting the owners to calculate their additional individual tax.  The owners would also be responsible for their share of any penalty and interest.  This election should also be addressed in the operating agreement.

Pres. Obama’s 2016-2017 Federal Budget Rehashes Many Old Tax Proposals but Also Makes Important New Proposals

On February 9^th Pres. Obama released his final budget proposal.  The budget has a very long list of proposed tax changes, generally proposed to take effect after 2016, which increase taxes by $2.8 trillion over 10 years!  While the chance of enacting the tax proposals is currently slim, proposals have a way of making a reappearance in future tax legislation.  Below is a selection from the many proposals.

Individual Tax Increases

·       The current top income tax rate on qualified dividends and long-term capital gains is 20% for taxpayers with income above $415,050 (single) or $466,950 (joint).  In addition, a 3.8% net investment income tax (NIIT) created under the Affordable Care Act applies.  The President proposes to increase the top tax rate on qualified dividends and long-term capital gains to 24.2% reaching 28.0% when the 3.8% NIIT is included.

·       Eliminate the specific identification method and require the average cost method for identifying the cost basis of “covered” stocks purchased after 2010.  This will prevent the “cherry picking” of high basis stocks for loss harvesting and of low basis stock for charitable giving.

·       Make Pell Grants excludible from income and from the American Opportunity Tax Credit thereby eliminating the planning that can create refundable tax credits.

·       Reduce the tax rate benefit of itemized deductions to 28% (which impacts taxpayers paying tax at the higher 33%, 35%, and 39.6% rates).

·       Implement the so-called “Buffett Rule” to require millionaires to pay no less than a flat 30% tax on income after the deduction of charitable contributions.

Business Tax Increases

·       Limit the amount of real estate like-kind exchange gain that can be deferred to $1 million per taxpayer per year (as indexed for inflation).

·       Tax “carried interests” (partnership or LLC profits interests) as ordinary income instead of long-term capital gain.

·       Require professional service business profits to be subject to Social Security and Medicare taxes regardless of whether the business is conducted through an S corporation, an LLC, or a limited partnership.

·       Repeal the LIFO method of inventory cost accounting.

·       Repeal the lower-of-cost or market and subnormal goods methods of inventory cost accounting. 

Estate and Gift Tax Increases

·       Increase the estate, gift, and generation skipping tax (GST) rate from 40% to 45%.

·       Lower the estate tax and GST exemptions from $5.45 million to $3.5 million.

·       Lower the gift tax exemption from $5.45 million to $1.0 million.

·       Require grantor-retained annuity trusts (GRATs) to have a minimum 10-year term and to have a remainder value for gift tax purposes equal to the greater of 25% of the value of the property transferred to the GRAT or $500,000.  These requirements eliminate the short-term, zeroed-out GRAT and also increase the size of the GRAT to at least $2 million to avoid a disproportionate size of gift.

·       Eliminate the benefits of a sale to an “intentionally defective grantor trust” by requiring the value of property sold to the trust to remain in the gross estate of the grantor, thereby preventing the shift of appreciation out of the estate.  In addition, the gift tax would apply to the transfer if the trust terminates and distributions are made to a third party.

·       Limit the duration of the exemption from the generation skipping tax to 90 years for “dynasty” trusts created after the date of enactment.

·       Eliminate the unlimited number of permitted annual gift tax exclusions for gifts of $14,000 per donee in favor of a flat $50,000 exclusion per donor for all gifts.

·       Under current law, most assets receive a new basis at death equal to the date of death value.  For gifts, the donee generally takes a carryover basis, meaning the donee pays the capital gain tax when the asset is sold.  Neither an inheritance nor a gift requires recognition of capital gain.

o   The proposal treats bequests and gifts other than to charitable organizations as a sale with the gain being included in the decedent’s final income tax return.  The capital gains tax paid at death may be deducted for estate tax purposes.  The combined estate, capital gain, and Utah taxes on appreciated property would amount to as much as 60%.

o   A spouse could inherit from a deceased spouse without immediate tax, but with carryover basis.  The tax would not be due until the death of the surviving spouse.

o   There would be an exemption from capital gains tax at death of up to $100,000 per individual ($200,000 per couple).  Note that these figures are “gains” and not the fair market value of the asset.  Any unused exemption of one spouse would “port” to the surviving spouse.  In addition, capital gains of up to $250,000 per individual ($500,000 per couple) for a personal residence would be exempt.  This additional exemption would also be portable between spouses.

o   Tangible personal property other than expensive art and similar collectibles would be exempt.

Limiting Retirement Plan Contributions

·       Under a new proposal, backdoor Roth IRA contributions would be eliminated by restricting conversions from traditional IRAs to only the pre-tax portion of the IRA.  Thus nondeductible IRA contributions would no longer be able to be converted to a Roth.  This concept is also extended to after-tax dollars in a 401(k) or profit sharing plan.  Essentially all after-tax dollars would be prevented from being converted to a Roth IRA.

·       The minimum required distribution rules would be extended to Roth IRAs so that distributions would be required once the account owner attained age 70 ½.  As a by-product, this change would also prevent further contributions to Roth IRAs after age 70 ½.

·       Non-spouse beneficiaries of IRAs and qualified plans and annuities would no longer be able to stretch-out distributions over their life expectancies as the account balances must be fully distributed by the end of the fifth year after the year of death.  For a minor child beneficiary, the distributions would commence after reaching the age of majority.

·       The President proposes to prohibit contributions to and accrual of additional benefits to IRAs, 401(k)s, and pension plans when balances are sufficient to produce an annual distribution of $210,000 in retirement.  Under current assumptions, the permitted balance would be about $3.4 million.

·       The special “net unrealized appreciation” (NUA) rules for employer securities received in a lump-sum distribution from a qualified retirement plan would be eliminated.  The NUA rule permits the gain on the sale of the stock to be long-term capital gain instead of ordinary income.  The repeal only applies to those who are younger than age 50 in 2016.

A Few Tax Cuts and Other Proposals

·       Increase the Section 179 expensing amount from $500,000 to $1,000,000.

·       Index the $25,000 limit on the cost of a sport utility vehicle that can be expensed under Section 179.

·       Expand simplified accounting methods for small businesses averaging $25 million (as indexed) of gross receipts over three years.

·       Increase the up-front expensing of start-up and organizational costs from $5,000 to $20,000.

·       Simplify and expand the research tax credit.

·       Permanently extend certain energy tax credits, such as the 30% solar panel credit.

·       Allow non-spouse inherited IRAs and retirement accounts to be rolled over within 60 days.  Rollovers are currently restricted to spouse beneficiaries.

·       Eliminate required minimum distribution rules for IRAs with account balances of $100,000 or less.

·       Require employees working at least 500 hours per year for three years be admitted into the employer’s qualified retirement plan.  Currently there can be a 1,000-hour requirement.

·       Impose the liability for unpaid corporate income taxes on shareholders.

Nevada’s New Commerce Tax

Last year the state of Nevada enacted a new annual Commerce Tax on business entities having gross income sourced to Nevada in excess of $4 million.  The effective date is July 1, 2015.  The amount of the Commerce Tax is the applicable tax rate multiplied by the amount of Nevada-sourced gross revenue in excess of $4 million.  The tax rate depends upon the North American Industry Classification System (NAICS) code of the business.  For a business having more than one industry, the NAICS code selected should be the industry producing the greater amount of Nevada-sourced gross income.  For example, construction (NAICS 23) bears a 0.083% tax rate while real estate rental and leasing (NAICS 53) bears a 0.250% rate.  Proposed regulations would allow a three-year averaging of gross receipts to make this determination.  Gross receipts from services are also subject to the tax.  Importantly, the initial tax report establishes the business tax rate category and a taxpayer cannot change that designation in the future without applying for a determination from the Nevada Department of Revenue.

Business entities include all forms of entities and include individuals filing Schedules C, E, or F as part of their Form 1040.  Entities excluded from the tax include:  tax-exempt entities under Section 501(c)(3), grantor trusts of which all grantors and beneficiaries are natural persons or charitable entities, estates of a natural person, and passive entities.  A passive entity is a partnership, limited liability company, or a trust that derives at least 90% of its gross income from dividends, interest, capital gains, royalties, etc. and that does not receive more than 10% of its gross income from conducting an active trade or business.

Businesses subject to the tax are required to use a July 1 through June 30 fiscal year regardless of their normal tax or accounting year.  The due date is the 45^th day following the fiscal year and no automatic extension is available, although a request of a 30-day extension for good cause may be requested.  The initial tax return and tax payment for the period of July 1, 2015 through June 30, 2016 is due August 15, 2016.  In the case where your tax return is selected for audit, Nevada law requires out-of-state businesses to pay the travel expenses of the Nevada state auditors who come to examine the books and records.

Businesses paying the Commerce Tax may be entitled to a credit against their Modified Business Tax (MBT) liability equal to 50% of their Commerce Tax beginning with the first quarter ending after the date the Commerce Tax is paid.  The credit is only available for the Commerce Tax fiscal year during which the tax is paid.  For example:  Company A pays $5,000 in Commerce Tax on August 15, 2016.  Company A may claim a $2,500 credit on its October 31, 2016 MBT tax return and carryover any unused credit against the MBT liability through June 30, 2017.  The MBT is an excise tax that employers pay on their employee wages.

The Commerce Tax is not a sales tax that can be collected from customers.  However, proposed regulations permit a “Commerce Tax Recovery Charge.”  If the business itemizes a Commerce Tax recovery charge among the other charges shown on a customer’s invoice or receipt, and makes a written statement that the charge is the “cost of compliance with the tax imposed upon it pursuant to section 20 of SB 483.”  If it is clear from the invoice that the recovery charge is part of the total price collected from the customer and that it is not an additional charge assessed on the customer’s total, then the business may pass along the tax to its customer if it chooses to do so.  The recovery charge may be necessary for low-margin businesses to maintain their profitability.

Update 6-7-2016

The Nevada Department of Taxation is requiring the filing of the Commerce Tax return even of businesses having gross receipts of $4 million or less and therefore not subject to tax. The filing is necessary to "declare" under penalties of perjury that the gross receipts did not exceed this amount.

For Whom Should Form 1099-MISC, Nonemployee Compensation, Be Prepared?

This post concerns only payments made in the course of your trade or business to independent contractors that are reported in box 7 of Form 1099-MISC as “nonemployee compensation.”  The IRS began asking questions about taxpayers’ compliance with preparing Forms 1099 with the 2011 income tax returns.  The purpose behind Form 1099 reporting is to close the “tax gap” by catching people who don’t pay income tax on all of their earnings.  Since tax returns are signed under penalties of perjury, answering this question accurately is important.  Congress has also dramatically increased the financial penalties for not filing Forms 1099 on time.  In general, the 2015 Form 1099-MISC should be provided to the recipient by February 1, 2016 and filed with the IRS by February 29, 2016 if filed on paper, or by March 31, 2016 if electronically filed.  Electronic filing is required if 250 or more forms will be filed.

Nonemployee compensation are payments made to independent contractors who are not organized as corporations.  This includes partnerships, limited liability companies not treated as corporations, and individual sole proprietors.  However, under a special rule, payments made to attorneys and law firms organized as corporations must still be reported.  Form 1099-MISC is required if total payments for services (including parts and materials) made to a recipient during calendar year 2015 amounted to $600 or more.  Payments for merchandise is not reportable.

How do you know whether a company is a corporation?  You must have the company complete Form W-9, Request for Taxpayer Identification Number and Certification.  The company indicates their entity classification on that form.  You should have a Form W-9 on file for everyone to whom you make payments.  If you are unsure of the business’ entity classification because there is no W-9 on file and you are running out of time to meet the Form 1099 filing due date, complete the Form 1099 anyway to avoid a potential penalty and get the W-9 completed in advance of the next payment you make to the company.  There is no harm or penalty for sending an unneeded Form 1099 to a corporation.  

Selections from the IRS’ Year End Guidance on Affordable Care Act Issues

The IRS issued Notice 2015-87 in the middle of December and Notice 2016-4 at the end of December.  They provide guidance on a variety of complicated issues pertaining to the ACA.  A few of these issues to take note of are: 

1.     Health reimbursement accounts (HRAs) are written plans where an employer agrees to reimburse certain health care costs of employees.  Such reimbursements are income tax free to the employee.  Except in a C corporation scenario, the tax-free nature of the reimbursements is not generally available to owner-employees.  Stand-alone HRAs are no longer permitted by the ACA unless they reimburse only excepted benefits.  Benefits excepted from the ACA’s market reform rules include dental or vision coverage.  If the HRA reimburses other health care costs such as co-pays or deductibles, the HRA must be integrated with a qualifying group health insurance policy.  If it is not, the employer is subject to a $100 per day per employee penalty, generally capped at $500,000 per year per entity.

2.     An HRA that covers fewer than two current employees is not subject to the ACA’s marketplace reform rules.  In this circumstance, the HRA can cover any health care cost and avoid the $100 per day penalty.

3.     The IRS clarified a fine point relating to HRAs that are integrated with a group policy.  The HRA loses its integration if the arrangement reimburses individuals not covered by the group policy.  For example, if an employee chooses self-only coverage, the HRA may not reimburse the health costs of the employee’s spouse and/or dependents because they are not covered by the group health insurance policy.  The IRS offers transition relief that ignores this violation through 2015 to give time for employers to come into compliance.

4.     The ACA requires applicable large employers to offer “affordable” health insurance to full time employees or face a penalty.  The law states that an employee’s share of the group policy premium must not exceed 9.5% of household income to be deemed affordable.  Because an employer will not know an employee’s household income, the IRS has provided several safe harbors to determine affordability.  One safe harbor is 9.5% of the employee’s W-2 compensation.  The 9.5% rate is adjusted for inflation.  For 2015 the percentage is 9.56% and for 2016 the percentage is 9.66%.

5.     An applicable large employer will be penalized for failing to offer health insurance if at least one full-time employee obtains health insurance on the exchange and receives a premium tax credit.  The penalty amount is $2,000 times the total number of full-time employees in excess of 30 (80 for 2015).  The penalty amount is indexed for inflation.  For 2015 the penalty is $2,080 and for 2016 the penalty is $2,160.

6.     An applicable large employer will also be penalized for failing to offer health insurance that is “affordable” or failing to at least meet the “bronze” level of benefits if at least one full-time employee obtains health insurance on the exchange and receives a premium tax credit.  The penalty amount is $3,000 times the number of full-time employees receiving such credits.  The penalty amount is indexed for inflation.  For 2015 the penalty is $3,120 and for 2016 the penalty is $3,240.

7.     In Notice 2015-87 the IRS states that it will not impose penalties on employers who make good faith efforts to comply with the ACA’s information reporting requirements for 2015 but who nevertheless make inaccuracies in the tax forms or miss the due date.  The penalty is up to $250 per form up to a maximum of $3 million!  In Notice 2016-4 the IRS extends the due dates for 2015 reporting.  Applicable large employers are now required to provide Form 1095-C by March 31, 2016 (instead of February 1, 2016) to employees and to file Form 1094-C by May 31, 2016 if filed on paper (instead of February 29, 2016) or by June 30, 2016 if filed electronically (instead of March 31, 2016) with the IRS.
There is no penalty waiver for failure to meet the due date unless there is reasonable cause for the failure.  Normally an extension of time should be requested.  However, for the 2015 Forms 1095-C and 1094-C the IRS has extended the due dates beyond the normal extended due dates.  Therefore, the IRS states that it will not grant any extension of the new 2015 due dates, but it will consider reasonable cause for late filing.  Factors taken into account for establishing reasonable cause include whether the employer made reasonable efforts to gather and transmit the necessary data to an agent to prepare the data for submission to the IRS and whether steps are being taken to ensure that the employer will be able to timely comply with next year’s reporting requirements.

8.     Now that the IRS has extended the ACA information reporting due dates, some individuals will file their 2015 income returns before receiving their ACA tax forms.  If such individuals have relied upon other information received from employers, or from health insurance providers, they will not be required to amend their income tax returns once they receive their Forms 1095-B or 1095-C, including any corrected forms.  However, the IRS has not extended the due dates for the Health Insurance Marketplace (or Exchange) to issue Form 1095-A.  Individuals who enrolled for coverage through the Marketplace should receive Form 1095-A by February 1, 2016 and should wait to file their tax returns until they receive their Form 1095-A.

Last Minute 2015 Personal Tax Planning

Consider implementing the following strategies by December 31st to save income taxes.  The income tax laws are now so complex that it is difficult to know whether any of these general recommendations will actually save you tax without undertaking a computerized tax projection.  You should consult your tax advisor before implementing these ideas. 

·       If you are in the upper tax brackets, harvest capital losses as necessary to reduce capital gains tax, and to lower the Affordable Care Act’s tax on net investment income.  Generally, short-term losses are preferred over long-term losses because short-term gains bear a higher tax rate than long-term gains.  Be sure to specifically identify the block of securities you are selling to your broker.  Don’t trigger capital losses if you are in a low tax bracket.  Be sure to avoid the “wash sale” rule that applies if you purchase substantially identical replacement securities within 30 days before or 30 days after the date of sale.

·       If you are in the lower tax brackets, harvest long-term capital gains as necessary to fill in the lower tax brackets.  For example, a zero percent long-term capital gain tax rate applies through $74,900 of taxable income for joint tax returns!  However, ordinary income fills up the low brackets first, so some coordination is necessary to achieve a zero percent tax rate.

·       Be sure that any year-end charitable donations are either delivered or mailed and postmarked by December 31st.  Be sure that you obtain the required tax-qualified receipt early next year so that documentation is available when preparation of your income tax return begins.  If you want a charitable deduction but are not prepared to actually give the funds to a charity at this time, consider using a donor advised fund (DAF) to claim the deduction now.  You can select the charity later and “advise” the DAF to contribute to the charity then.

·       For those at least age 70 ½, consider using your traditional IRA to make a direct charitable donation of up to $100,000 to a public charity (but not a DAF).  This provision had expired at the end of 2014 but was just retroactively reinstated for 2015 donations and has now been made permanent.  The charitable IRA donation is also considered a distribution for purposes of your 2015 minimum required distribution.  Coupled with the phase out of itemized deductions, personal exemptions, and the net investment income tax, the charitable IRA donation can be effective in lowering your overall income tax.  This strategy is also very effective for Social Security recipients whose benefits are not fully subject to income tax.

·       Consider donating any long-term appreciated securities to charity.  You can claim a tax deduction equal to the fair market value of the securities without triggering tax on the capital gain.

·       For those at least age 70 ½, and for those of any age who have inherited an IRA, don’t forget to take your minimum required distribution by December 31st to avoid a 50% penalty.

·       Prepay state income tax unless you are subject to the alternative minimum tax (AMT).  Taxes are not deductible for the AMT.

·       Consider accelerating ordinary income into 2015 if you are subject to the AMT and may not be in 2016.  The top AMT tax rate is lower than the top ordinary tax rate.

·       If you exercised incentive stock options (ISOs) in 2015 and the value of the stock has dropped, consider selling the ISO stock by year-end in order to purge the AMT ISO adjustment so that you don’t pay tax on value that has disappeared.

·       Consider making a Roth IRA conversion if you are in a low tax bracket this year.

·       Keep a focus on your adjusted gross income (AGI).  Many deductions and credits are lost, and additional taxes can apply, depending on the size of your AGI.  Lost tax benefits due to high AGI include the deduction of personal exemptions, itemized deductions, some IRA deductions, the ability to contribute to a Roth IRA, educational credits, taxation of Social Security benefits, and Affordable Care Act taxes.  Therefore, it generally makes sense to keep your AGI as low as possible.

·       For purposes of gift and estate tax planning, don’t forget to use the $14,000 annual exclusion.  Giving cashier checks is advisable when cash gifts are made at year end to be sure that the gift is completed in the 2015 calendar year.