2015 Year-End Tax Planning Traps and Opportunities

Congress changes federal tax law almost every year. Some changes are very dramatic, and other changes are so subtle that tax lawyers must scour them to find the nuances. Federal tax law changes for the 2015 tax year (affecting income tax returns filed in 2016) fall in the modest category, but it helps taxpayers to know what to expect.

Affordable Care Act

The affordable care act (sometimes called "Obamacare") required taxpayers that did not have health insurance in 2014 to pay a penalty of 1% of household income up to a maximum of $285. According to information obtained at www.healthcare.gov, the penalty was 2% of household income in 2015 up to a maximum of $975, and it will rise to 2.5% in 2016 up to a maximum of $2,085. As a penalty increases, the cost of being uninsured will become very expensive for people who can afford insurance.

Last-Minute Business Deductions

Business owners that are thinking about buying supplies, tools, equipment, and furnishings often try to make those purchases at the end of the year so that they can deduct the expenses against that year's income taxes. The deduction limit for 2015 is $500,000. As the economy grows, business owners may want to think carefully about whether to deduct one-time purchases in the current tax year or delay them until the next year, because an unusually large expenditure in a less profitable year will deprive the business owner of the valuable deductions in a more profitable and heavily taxable future year.

Retirement Plans

Some people with individual retirement accounts (IRAs) and employer-sponsored retirement plans can make "catch-up" contributions to their plans. Plan holders under 50 years old can contribute tax-deductible plan contributions of up to $5,500, but plan holders over 50 years of age can contribute an additional $1,000, for a total of $6,500 per year.

Health Savings Accounts

Almost everyone has experienced an increase in health insurance premiums over the past decade. For those people with high deductibles, health savings accounts offer opportunities for people to save money for health expenditures with pre-tax dollars much as they save for retirement in IRAs. Ordinarily, a taxpayer younger than 65 years old can only deduct medical expenses that exceed 10% of the taxpayer's adjusted gross income. For example, a taxpayer making $50,000 per year and spending $7,500 per year on medical expenses can only deduct the last $2,500 of medical expenses. By contrast, the same taxpayer could invest $7,500 in a health savings account tax-free, and then spend the $7,500 on the same medical expenses without having to pay income taxes on the first $5,000.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.

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