2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

IRS Announces 2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2015 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2015 tax year, the following tax rates will apply:

If the Taxable Income Is: The Tax for Married Individuals Filing Jointly is:
Less than or equal to $18,45010% of the taxable income
Over $18,450 but not over $74,900
$1,845 plus 15% of the excess over $18,450
Over $74,900 but not over $151, 200$10,312.50 plus 25% of the excess over $74,90010% of the taxable income
Over $151,200 but not over $230,450$29,387.50 plus 28% of the excess over $151,200
Over $230,450 but not over $411,500$51,566.50 plus 33% of the excess over $230,450
Over $411,500 but not over $464,850$111,324 plus 35% of the excess over $411,500
Over $464,850$129,996.50 plus 39.6% of the excess over $464,850
If the Taxable Income Is: The Tax for Heads of Households is:
Not over $13,15010% of the taxable income
Over $13,150 but not over $50,200$1,315 plus 15% of the excess over $13,150
Over $50,200 but not over $129,600$6,872.50 plus 25% of the excess over $50,200
Over $129,600 but not over $209,850$26,722.50 plus 28% of the excess over $129,600
Over $209,850 but not over $411,500$49,192.50 plus 33% of the excess over $209,850
Over $411,500 but not over $439,000$115,737 plus 35% of the excess over $411,500
Over $439,000$125,362 plus 39.6% of the excess over $439,000
If the Taxable Income Is: The Tax for Unmarried Individuals is:
Not over $9,22510% of the taxable income
Over $9,225 but not over $37,450$922.50 plus 15% of the excess over $9,225
Over $37,450 but not over $90, 750$5,156.25 plus 25% of the excess over $37,450
Over $90,750 but not over $189,300$18,481.25 plus 28% of the excess over $90,750
Over $189,300 but not over $411,500$46,075.25 plus 33% of the excess over $189,300
Over $411,500 but not over $413,200$119,401.25 plus 35% of the excess over $411,500
Over $413,200$119,996.25 plus 39.9% of the excess over $413,200
If the Taxable Income Is:The Tax for Married Individuals Filing Separate Returns is:
Not over $9,22510% of the taxable income
Over $9,225 but not over $37,450$922.50 plus 15% of the excess over $9,225
Over $37, 450 but not over $75,600$5,156.25 plus 25% of the excess over $37,450
Over $75,600 but not over $115,225$14,693.75 plus 28% of the excess over $75,600
Over $115,225 but not over $205,750$25,788.75 plus 33% of the excess over $115,225
Over $205,750 but not over $232,425$55,662 plus 35% of the excess over $205,750
Over $232,425$64,989.25 plus 39.6% of the excess over $232,425
If the Taxable Income Is:The Tax for Estates and Trusts is:
Not over $2,500
15% of the taxable income
Over $2,500 but not over $5,900$375 plus 25% of the excess over $2,500
Over $5,900 but not over $9,050$1,225 plus 28% of the excess over $5,900
Over $9,050 but not over $12,300$2,107 plus 33% of the excess over $9,050
Over $12,300$3,179.50 plus 39.6% of the excess over $12,300

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,340,000 to $5,430,000. This means that decedents who die in 2015 have an estate tax exclusion that has increased by $90,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2014. The 2015 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable YearLimitation on Premiums
40 or less $380
More than 40 but not more than 50 $710
More than 50 but not more than 60 $1,430
More than 60 but not more than 70 $3,800
More than 70$4,750

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan has increased from $17,500 to $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. However, the limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan), and $183,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $183,000 for married couples filing jointly and $116,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2015. The credit is now $61,000 for married couples filing jointly, $45,750 for heads of household, and $30,500 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance.

Estate Planning and Charitable Intentions

For many reasons, people are making a greater effort to make sure that their estate plan has an effect on both their own family, and a variety of charities.  The New York Times recently ran a piece entitled In Estate Planning, Family Isn’t Always First by Caitlin Kelly that said as much.  While many still aren’t making an effort to put together estate plans for the efficient administration of asset transfer at death, many, many more are at a higher rate than in years past.

It is mere speculation to think that charities have done a better job educating the populace about the benefits of giving to their organization during and after the recession.  Or, perhaps the advent of tools like Donor Advised Funds such as those offered by Fidelity, T. Rowe Price and Vanguard, have changed the giving landscape.  Regardless, clients seem to be interested in either creating a legacy or benefiting many of the same organizations they worked with closely during life, through their estate plan.

Both the client and the estate planner should have an in depth discussion about who the client is ultimately trying to benefit.  It is critically important for the estate planner to make a proper determination about the ultimate beneficiary of the client’s estate plan.  This is true if the client has a long history of giving to a particular organization, or even if the client decides that an organization is worthy of receiving their assets at death, but has never directly given to that organization.

For the sake of explanation, take this example.  If a client indicates that he or she wishes to benefit the United Way, problems could arise if the estate plan merely transfers assets at death to “United Way.”  Did the client intend to benefit the global organization, or a local chapter of the United Way?  While the answer to this question might seem obvious if the client had a long history of involvement with her local chapter of the United Way organization, it may not be obvious if she deemed them to have a worthwhile purpose that she planned to benefit with a bequest from her estate, even though she did not benefit the organization during life.

A general goal of estate planning is to inject efficiencies into the process of asset distribution at death.  Lack of clarity regarding charitable intent can make estate administration grossly inefficient.  If the Executor of the estate, or Trustee of the client’s Trust is unsure of the exact beneficiary of the estate, he or she may have to seek guidance to properly abide by their fiduciary duty under the law to properly administer the estate.  That fiduciary duty could result in request for Court interpretation of the Last Will or Trust, an inefficient process, to say the least.  The Court process could be both time consuming, and costly to all involved.

It is certainly possible to reduce the likelihood of confusion during estate planning.  A good estate plan drafter should do some homework.  Information from the client should be gathered to find out more about the organization that is to be the recipient of the client’s estate distribution.  There are times when the organization may simply not be a viable recipient of the estate bequest.  While many charitable organizations do great things, some of them are tenuously in existence, at best.  Perhaps one individual effectively runs the charity and if something happened to that person, the entity would shut down.  If this is the case, the estate planner should draft accordingly to allow the Trustee some flexibility. Perhaps the Trustee distributes assets to an alternative organization in existence at death.  Or the bequest lapses if the organization no longer exists.  All of this information can be included in the plan.

To prevent the type of confusion illustrated above in the United Way example, the estate planner should clarify the client’s wishes and investigate the organizational structure of each charity.  It could be that there is one umbrella organization where all funds are directed, but noted as benefitting a particular geographical division of the organization.  Some entities are really an amalgam of multiple regional charities that are loosely held together and merely market together without having a structural entity controlling them. 

Upon investigation, the estate planner should be able to learn how to properly draft the charitable bequest.  That bequest should include the proper legal name of the entity and its Federal Tax Identification number.   It may be helpful to the Executor or Trustee to also include a current address and phone number in the beneficiary designation.  The planner should also include directions regarding what happens if the organization either no longer exists or if it has been acquired or absorbed into a successor organization.  All of these events are very possible, especially when the plan preparation is removed by many years from the date of death.

If you have questions about how you can properly plan for charitable distributions at death, or any other estate planning questions, please contact our office.

Professional Assistance With Long-Term Tax Delinquencies Can Be Key To A Turn Around

If you have experienced a continuing struggle with handling your ongoing employment and income tax filings and payments, you may be facing the stark reality that managing these obligations is getting more and more difficult.  Some businesses have operated off the premise that the federal and state government will perpetually respond to their tax problems in a certain way.  That response by the government, through a series of notices, delayed responses, and payment plans, is changing faster than ever.  This is especially true at the state level.  Businesses should not make what was once predictability of tax collections by the government a part of how they manage their ongoing business expenses.

While the government may not upgrade their technologies as quickly as the private sector, the actions being taken are making a difference in closing the Tax Gap. This is true at the federal level and even more so at the State level.  As Bloomberg Business Week reports, states are taking much more aggressive action to capture lost sources of tax revenue.  States are using better resources of data collection along with other enforcement tools to prevent businesses, large and small, from operating in a non-compliant tax status.

From a business perspective, the stark reality is that there are some businesses on the fringe of existence that may simply be forced to cease operations as the tax collection activity described here intensifies.  It’s my opinion that this is not necessary.  Rather, if these businesses spend less time juggling some of these obligations and direct their time towards the expertise they have related to their primary business function, their likelihood of success is much greater.  We have seen the most success for clients who have long-term tax delinquencies when that client acquires proper legal and accounting assistance.  For a long-term problem, a long term solution is necessary. 

Certified Public Accountants and other tax return specialists can provide a level of service that is invaluable to any business.  Assistance from a tax lawyer can be an important tool which allows for a delinquent taxpayer to create a long term plan for tax debt resolution which is then executed upon by the taxpayer, its accountant and lawyer.  Most clients find that the support of professionals that can readily provide expert guidance on stressful tax matters are invaluable.  The relief provided to the business owner typically gives them the breathing room they finally need from a stressful situation to focus on the reason they entered their business to begin with.  It is highly rewarding for the tax lawyer and accounting professional to observe this process.  No business operation will ultimately succeed with the passion of its owners for the services or products it provides. 

As a tax lawyer I have observed that the combination of a Certified Public Accountant or other tax return professional with the guidance of a tax lawyer is a highly beneficial combination for a delinquent business taxpayer.  The reality is that the Certified Public Accountant or tax return professional likely has all the expertise to resolve these issues, but due to the reality of the tax season, that person lacks the time to provide the level of assistance demanded from a Revenue Officer or other collection agent.  Without the obligations of providing return preparation services for clients, I have found the ongoing demands of dealing with delinquent tax matters for clients to be manageable. 

Ideally, the long term is a viable business with a plan to manage ongoing tax obligations while addressing delinquencies in a manner that does not effectively shut down the business.  Once that plan is in place, the taxpayer’s Certified Public Accountant or return preparation professional can provide services to manage current tax filing and payment obligations.  Should the government return for review of the client’s ability to address the tax delinquencies, the tax lawyer can return to representation to assist with that issue. 

As a business owner with a long term delinquency a critical perspective to have when acquiring professional assistance is that there is no “quick fix.”  A multi-year problem will likely take many months, if not years, to resolve.  But it can, and does, happen.  Feel free to contact us to discuss these issues if you have them.

Income Tax Consequences of Terminating a Whole Life Insurance Policy

The United States Tax Court just handed down a decision in Black v. Commissioner of Internal Revenue, T.C. Memo 2014-27, that explains what the income tax consequences are when this situation occurs.  In the opinion, the taxpayer had been the owner of a whole life insurance policy for over twenty years.  The policy had both cash value and loan features.  The policy allowed the taxpayer to borrow up to the cash value of the policy.  Loans from the policy would accrue interest and if the policy holder did not pay the interest then it would be capitalized as part of the overall debt against the policy.

The taxpayer had the right to surrender the policy at any time and receive a distribution of the cash value less any outstanding debt, which could include capitalized interest.  If the loans against the policy exceeded the cash value, the policy would terminate.  In this case, the taxpayer invested $86,663 in the life insurance policy, his total premiums paid for the policy.  Prior to the termination the total the taxpayer had borrowed from the policy was $103,548, however with capitalized interest over time the total debt on the policy was $196,230. The policy proceeds retired the policy debt at termination.

The taxpayers in this case were issued a 1099-R showing a gross distribution of $196,230 and a taxable amount of $109,567.  The non-taxable difference of $86,663 was the taxpayers’ investment in the policy – premiums paid. None of the information was included on the taxpayers’ return.  The taxpayers eventually amended their return and included as income the amount of $16,885 which represented the difference between the loan principal amount borrowed of $103,548 and the amount of premiums paid of $86,663.  Ultimately, the IRS disagreed with the taxpayers’ representation of the tax consequences of the life insurance policy termination.

The primary issue in the case then centered around whether or not the capitalized interest from the outstanding policy loans should be included in income. The Court explained that the money borrowed from the policy was a true loan with the policy used as collateral.  There were no income tax consequences on distribution of loan proceeds from the insurance company to the taxpayers.  Further, the Court explained that this is true of any loan as the taxpayers’ were obligated to re-pay the insurance company the debt owed.

The Court explained that when a policy is terminated then the loan is treated as if the proceeds were paid out to the taxpayers and the taxpayers then retired the outstanding loan by paying it back to the insurance company. The Internal Revenue Code provides that proceeds paid from an insurance company, when not part of an annuity, are generally taxable income for payments in excess of the total investment.  The insurance policy at issue treated the capitalized interest as principal on the loan. Therefore, when the policy is terminated, the loan, including capitalized interest, is charged against the proceeds and the remainder is income. This outcome makes sense or else the return on investment inside of the policy would never be taxed.

The taxpayers ended up with a large tax bill and a tough pill to swallow.  Ultimately, the result is logical in the context of capturing deferred income tax consequences.  Clearly, it would have been beneficial for the taxpayers to have consulted with counsel prior to preparing their tax return in order to avoid an unwelcome tax bill, penalties and interest.

Should you have transactions that you are unsure of when it comes to their income tax consequences, feel free to contact our office.  If you find yourself in receipt of an adjustment to your tax return based on exam action that you disagree with, or an assessment has been made and you have simply decided you were incorrect in your analysis, call us, we can help.

Anticipating a shortfall on your 2013 tax return?

Haven’t seen your CPA since you filed your tax return in early 2013?  Paid the minimum in estimated taxes to avoid being penalized by the IRS? Made approximately the same amount of money in 2012 as 2013? You may have a problem – a tax debt problem. Don’t panic, review all your options before taking drastic action to pay that tax bill.

So what happened? A lot. 2013 brings with it many tax increases for those in higher income tax brackets.  Individuals earning over $250,000 and couples earning over $300,000 will start to lose their itemized deductions. Individuals earning over $400,000 and couples over $450,000 hit the new 39.6% top marginal tax rate.  Additionally, they are subjected to the 3.8% medicare surtax on investment income.  Finally, they lose the personal exemption of $3,900 this year.  These quickly add up.  Capital gains rates have taken a “bump” too for those earning more than $400,000 as a single person and over $450,000 as a couple, from 15% to 20%. 

These new changes may cause some to be surprised when they pick up their tax returns.  Taxpayers who have owed little or none before may find themselves in a situation where they don’t have liquid cash to simply write a check the U.S. Treasury. If you don’t have the cash, the last thing you want to do is take action that increases your 2014 tax bill.  In other words, you wouldn’t want to take an early withdrawal from your IRA or 401(k).  These withdrawals could cause you to incur both taxes and penalties. Further, you want to avoid a cash out of non-retirement assets that drive up your capital gains taxes or cause you to incur other ordinary income tax consequences. 

Perhaps you have access to a line of credit to pay your taxes – either secured or unsecured – such as a home equity loan or line of credit through a bank card. These could carry hefty closing costs if you are trying to establish them for the purpose of accessing cash to pay the taxes. And, home equity loans on average carry a 6% interest rate at this time.  Other lines of credit could carry interest rates in the double digits. A problem with using the line of credit, especially if you don’t have it established, is that it could take time to obtain the cash.  Delay in paying the tax bill could cause further penalties and interest.

One option that you can consider, if you need time, is asking the IRS for a “full pay delay.” It is not uncommon for the IRS to place a 120 day hold on collection action while you acquire funds.  Another option is to establish a payment agreement directly with the IRS.  In many cases, the payment agreement can be established without full financial disclosure and without the filing of a tax lien.  The interest rate at the IRS is actually pretty low, currently about 3%.  Additionally, penalties for failure to full pay your tax bill will accrue.  Regardless, this is another viable option that may very well be your cheapest overall option.

When analyzing this type of situation, regardless of what option the taxpayer chooses to resolve the debt, the taxpayer must plan for 2014 current taxes.  This will be necessary to avoid a similar shortfall like the one in 2013.  So, from a cash-flow perspective, the taxpayer will have to balance some mechanism to retire the 2013 taxes while not creating a new balance for 2014. 

If a taxpayer has a $25,000 shortfall for 2013, that will likely also be the case for 2014.  As such, an increase of greater than $2,000 per month in estimated taxes will be required to close the gap.  This type of foresight is necessary when looking at options to deal with the 2013 debt.

If you would like more assistance with resolving your 2013 tax balances and planning for 2014, please don’t hesitate to contact our office.