- Tax changes in recent years included a new Medicare surtax for high-income earners, a new top rate for dividends, long-term capital gains and the phase-out of itemized deductions for high earners.
- If you’re subject to higher taxes, it’s even more important to take advantage of whatever tax breaks apply to you.
- Learn more about this year’s inflation adjustments and common tax breaks, including retirement plan contributions and charitable giving.
Although there are no major tax law changes this year, there are still inflation adjustments and other routine changes to consider. As always, it’s not what you make but what you keep that counts, that’s why it’s important to take advantage of every tax break you’re entitled to. Here are a number of items to consider as you plan for the year ahead.
Take advantage of federal income tax changes
To keep pace with inflation, the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits1 (see table below). For additional information, please visit the IRS website.
2015 federal income tax brackets
|Tax rate on ordinary income||Single||Tax rate on qualified dividends and long term capital gains|
|Married filing jointly /
Qualifying widow or widower
Payroll and Medicare taxes
Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act (FICA), which is why they’re often referred to as the FICA tax. While Social Security (Old-Age, Survivors and Disability Insurance, or OASDI) withholding remains 6.2%, the wage base limit was increased to $118,500. That means a maximum of $7,347 per employee will be withheld in 2015 ($118,500 × .062).
The wage base for Medicare withholding remains unlimited (employee tax rate of 1.45%), but healthcare reform legislation in 2013 increased Medicare payroll withholding by 0.9% to 2.35% for amounts over $200,000 (single filers) or $250,000 (married filing jointly). Also, an additional 3.8% surtax applies to net investment income for taxpayers with AGI over $200,000 (single filers) or $250,000 (married filing jointly).
If you’re married, filing jointly and pay excess Medicare taxes, you’ll be eligible for a credit when you file your tax return—you can’t just ask your employer to stop withholding the extra tax during the year. For example, let’s say you’re the only earner in a married couple. You make $225,000 in the course of the year, and your employer automatically withholds the additional 0.9% tax on your wages between $200,000 and $225,000. You’ll be eligible for a credit when you file, because your total income falls below the $250,000 threshold for married joint filers.
Long-term capital gains and qualified dividends
A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $413,200 ($464,850 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%.
EXAMPLE: If a married couple already has $464,850 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of taxable income and $100,000 in long-term capital gains and qualified dividends, then $64,850 of the additional amount would be taxed at 15% and $35,150 would be taxed at 20%.
Phase-out of itemized deductions and exemptions
The phase-out of certain itemized deductions and exemptions applies to single taxpayers with adjusted gross income (AGI) above $258,250 and married taxpayers filing jointly with AGI above $309,900. Many itemized deductions (such as mortgage interest expense, charitable contributions and state and local taxes) are reduced by 3% of the amount by which the AGI exceeds the threshold, with a maximum of 80% of itemized deductions. The personal exemption phase-out applies at a rate of 2% for each $2,500 increment over the threshold up to a maximum of 100% elimination of personal and dependent exemptions.
See if you’re exempt from the Alternative Minimum Tax (AMT)
The AMT income exemption amounts increase in 2015 to $83,400 for married couples filing jointly and $53,600 for single filers.
Take advantage of lower tax rates for children
In 2015, children under 19 will pay no federal income tax on the first $1,050 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $1,050. However, they will be taxed at their parents’ tax rate on unearned income in excess of $2,100. (This will also be the case for full-time college students under age 24, unless their earned income is greater than one-half of their parents’ support.)
Individuals age 19 and older (and dependent full-time college students age 24 and older) pay taxes at their own rate.
Boost your retirement savings and potentially enjoy tax benefits
2015 federal limits for retirement accounts
|Account||Contribution limit||Additional catch-up contribution for people age 50 and older|
|401(k), 403(b) and 457||$18,000||$6,000|
|QRP/Keogh and SEP-IRA||20% of net self-employment income
(or 25% of compensation) up to $53,000
|Individual 401(k)||20% of net self-employment income
(or 25% of compensation)
plus $18,000, up to $53,000
and Roth IRA
A few things to note about contribution limits:
- Traditional IRAs. Money you put in a traditional IRA is generally tax-deductible unless you’re an active participant in a qualified workplace retirement plan, such as a 401(k) or 403(b). In that case, restrictions apply. If you’re a single filer, your contribution is partially deductible if your modified adjusted gross income (MAGI) is between $61,000 and $71,000. If you’re a married couple filing jointly, your 2015 contribution is partially deductible if your MAGI is $98,000 to $118,000. If you don’t participate in a retirement plan at work (but your spouse does) and you file jointly, your contribution is partially deductible if your MAGI is $183,000 to $193,0002.
- Roth IRAs. If you’re a single filer and your MAGI is $116,000 or less, your contribution limit is $5,500 (or $6,500 if you’re 50 or older) in 2015. The contribution limit is gradually reduced for those with MAGIs of $116,000 to $131,000. If you’re a married couple filing jointly and your MAGI is $183,000 or less, your contribution limit is $5,500 ($6,500 if you’re 50 or older). That contribution limit is gradually reduced for those with MAGIs of $183,000 to $193,000.
Anyone can convert all or part of a traditional IRA to a Roth IRA, regardless of income level or filing status. Converting could be advantageous if you expect to be in the same or higher tax bracket when you withdraw the money, have a reasonably long time horizon and can afford to pay the conversion tax from a source other than your IRA at the time of conversion.
Manage college expenses with these nifty tax benefits
Consider these tax-favored ways to pay for college costs:
- A Coverdell Education Savings Account. If you’re a single filer, you may make a maximum contribution of $2,000 per year per child, subject to income limitations. Be careful if accounts are established by different family members for the same child. Total contributions may not exceed $2,000 in any one year.
- A 529 college savings plan. Although there’s no limit to how much you can contribute each year, each state’s plan has its own lifetime limit—typically more than $200,000 per designated beneficiary3. You can also treat a 529 contribution as being made over five years for gift tax purposes. For example, a married couple could contribute up to $140,000 per child up front without using any of their lifetime gift tax credit (see below).
- Tax credits. The American Opportunity Tax Credit is a modification of the Hope Credit and makes the credit available to a broader range of taxpayers. You may claim up to $2,500 on eligible college expenses paid from a non-529 account, subject to income limitations.
- Tax deductions. You may be able to deduct up to $2,500 of student loan interest, subject to income limitations.
Plan your gifts and estate to make the most of these tax breaks
The gift tax annual exclusion amount remains $14,000 for 2015. That means you generally can give up to $14,000 every year (or $28,000 for spouses splitting gifts) to any number of people without those gifts being taxed. You can also give unlimited amounts toward tuition or medical expenses if you pay the provider directly. Beyond that, the lifetime gift and estate tax exemption will apply (see table below).
Estate and gift tax for 2015
|Estate Tax||Gift Tax|
|Highest rate||Exemption||Highest rate||Exemption|
|40%||$5.43 million*||40%||$5.43 million*|
*Adjusted annually for inflation
1. In some instances, modified adjusted gross income (MAGI) may be used to determine eligibility for certain deductions. MAGI calculations vary, so consult your tax professional.
2. Within certain AGI (or MAGI) phase-out ranges, you receive partial deductibility (or eligibility to contribute, in some cases) for certain tax breaks. At or below the low end of the range, you can receive full deductibility (or eligibility), but at or above the high end of the range, you lose deductibility (or eligibility).
3. As with any investment, it is possible to lose money investing in any investment and in a 529 plan. Before investing, carefully consider your investment objectives and any plan’s investment objectives, risks, charges and expenses. Additionally, if you are investing in a 529 plan outside the state in which you pay taxes, you should consider your own state’s 529 plan to determine if you can obtain any tax or other benefits offered by your own state’s plan.
4. The Investment Advisor LLC is not an accounting firm and does not provided tax advice. All information presented in this post is for advisory purposes only. You may want to consider consulting with your CPA and Accountant to determine the impact of this information on your tax situation.