MAKING THE MISSION POSSIBLE:UNCOVERING THE LATEST YEAR-END TAX PLANNING STRATEGIES

MARTIN S. FINN, CPA, JD, LL.M.LAVELLE & FINN, LLP

MARTY@LAVELLEANDFINN.COMWWW.LAVELLEANDFINN.COM

Making the Mission Possible: Uncovering the Latest Year-End Tax Planning Strategies

I. Legislative Update

A. Federal

1. Tax Rates for 2015 (Exhibit A)

a) Top Ordinary Income Tax Rate - 39.6%

b) Capital Gains/Dividends Rate - 0% (10% and 15% brackets), 15%

(25%, 28%, 33% and 35% brackets) or 20%

c) Alternative Minimum Tax Rate (“AMT”) - 26%/28%

d) Medicare Surcharge -

(1) Net Investment Income Tax (“NIIT”) - 3.8%

(2) Additional Medicare Wage Surcharge - 0.9%

e) 2016 Inflation Adjustments Issued - Rev. Proc. 2015-53, 2015-

44 IRB 1 (21 October 2015)

2. Surface Transportation and Veterans Health Care Choice Improvement

Act of 2015 (“Highway Trust Fund” Act) - 7/31/15

a) Mortgage reporting requirements - after 2016 lender must

report outstanding principal, mortgage origination date and

address or description of mortgaged property

b) 6-year statute of limitations if basis overstated

c) Tax return due dates (effective for taxable years beginning after

12/31/15) -

(1) Partnership returns - 3/15 with 6 month extension

available

(2) Fiduciary Returns - 4/15 with 5 ½ month extension

available

(3) “C” Corporations - 4/15 with 5 month extension

available

d) Basis consistency -

(1) Generally, beneficiary’s basis received from a decedent

must be consistent with the value of the asset reported

on the estate tax return

(a) Executor has reporting responsibilities to

beneficiaries

(b) Effective date postponed to 2/29/16

3. Same-Sex Marriages

a) After Windsor and Obergefell, same-sex married couples now

considered legally married for federal and state tax filing

purposes

(1) Consider benefits of filing amended joint income tax

returns for open tax years

(2) Also consider filing amended estate and gift tax returns

to take into account marital deduction

b) IRS issued proposed regulations on October 21, 2015

implementing these decisions and confirming that the federal

tax code provisions relating to marriage should be interpreted

to include same-sex spouses as well as opposite-sex spouses.

4. Status of Tax Extenders Bill?

a) Nothing yet

(1) Senate Finance Committee approved a two-year

extension in July

b) “Extenders” at risk -

(1) State and local sales tax deduction

(2) Tuition and fees deduction

(3) Educator’s expenses

(4) COD income - mortgage debt

(5) Mortgage insurance premium deduction

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(6) Charitable contribution of IRA

(7) Energy efficiency tax provisions

(8) Expanded Section 179 deduction

(9) Special “bonus” depreciation

(10) Qualified small business stock gain exclusion

B. Tax Provisions in NYS FY 2015-16 Budget

1. No major income tax changes

2. Extends for 2 years the charitable deduction limitation for individuals

with AGI of more than $1 million and less than $10 million (50% of

Federal deduction) and for individuals with AGI of more than $10

million (25% of Federal deduction)

3. Estate tax technical corrections

a) On October 27, 2015, the New York State Department of

Taxation and Finance issued a Technical Memorandum (“TSB”)

that provides estate tax guidance for residents and for

nonresidents owning New York property. Specifically, the TSB

provides guidance on how to compute allowable deductions for

resident and nonresident estates, and examples to illustrate

the computations. TSB-M-15(4)M.

II. Year End Planning Ideas

A. Basic Concepts

1. Know Your Tax Bracket - 2015 & 2016

a) Consider AMT, NIIT and limitation on itemized deductions and

personal exemptions

2. Time Value of Money

3. Income Character - Ordinary v. Capital Gain

4. Consider AMT applicability

5. Need a good tax projection software

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B. Traditional Year End Planning

1. Defer (Accelerate?) Income

a) Year-end bonuses

(1) Availability of deferred compensation plan

b) Retirement plan distributions

(1) Defer first year RMD

c) Delay Roth conversions

d) Defer billings and collections

e) Postpone sale of appreciated assets, e.g., investment securities

and closely-held business interests, or consider installment sale

(1) If sale is necessary, be sure to meet long-term holding

requirement to take advantage of lower capital gain

rates

f) Postpone US Savings Bonds redemption

2. Accelerate (Defer?) Deductions

a) Prepay bills -

(1) Real estate taxes

(2) Mortgage interest

(3) State estimated tax payment

(4) Charitable pledges

(5) Business supplies

b) Bunch itemized deductions -

(1) Medical expenses - 10% of AGI floor (7.5% for 65 and

older)

(a) Health and long term care insurance premiums

(b) Medical and dental services

(c) Prescription drugs

(d) Mileage (23 cents per mile)

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(2) Miscellaneous expenses - 2% of AGI floor

(a) Professional fees

(b) Tax planning and return preparation

(c) Investment advice and fees

(d) Unreimbursed business expenses

c) Charitable deductions -

(1) Mail check before 12/31/15

(2) Use credit card

(3) Consider gift of appreciated securities

(a) Avoid capital gain

(b) Deduct FMV

(4) Gift used clothing, books and furniture

(5) Obtain appropriate documentation

d) Harvest capital losses before year end

(1) Offset capital gains

(2) Beware wash sale rule

(a) Loss deferred if substantially identical security

purchased within 30 days before or after sale

(b) Buy securities of a different company in the same

industry or in a mutual fund that invests in that

industry

(c) Buy a bond of similar quality and duration from a

different issuer

(d) Wait 31 days to sell after purchase or wait 31

days to repurchase after sale

(3) Deduct excess capital losses at $3,000 per year clip

indefinitely

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C. NIIT Planning

1. Imposes an additional 3.8% tax on net investment income of individual

taxpayers, estates and trusts with income in excess of certain

thresholds

a) Estate/trust threshold much lower than individual thresholds

2. Net investment income includes interest, dividends, capital gains,

rental and royalty income, non-qualified annuities and passive activity

income

3. Planning options

a) Monitor and document time spent on “business” activities to

avoid passive classification

(1) Must be a material participant

(2) Trusts can qualify for the real estate professional

exception to passive activity loss rules depending on

involvement of trustee

b) Consider investment alternatives such as tax-exempt securities

and life insurance

c) Make estate/trust distributions before year end to clear out

income

(1) “65 Day” Rule - A trustee of a complex trust and an

executor of an estate can elect to treat distributions

made in the first 65 days of a tax year (Jan. 1 - Mar. 6, in

a non-leap year) as occurring in the prior tax year.

(a) Avoid harsh fiduciary tax brackets

(b) Push income back into tax year in which

beneficiary is in a lower tax bracket

(c) minimize or eliminate 3.8% NIIT

D. Retirement Plans

1. Maximize current year tax-deferred contributions

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a) At a minimum, contribute amount necessary to obtain

employer match

2. Consider Roth conversion

a) Convert tax-deferred growth to tax-free growth

b) No income-based limit but converted amount is taxable income

c) Factors to consider:

(1) Age

(2) Tax bracket changes - current and future years

(3) Ability to pay tax from non-IRA funds

d) “Back door” Roth IRA

(1) Non-deductible contribution to Traditional IRA and

convert to Roth

3. Be sure to adopt new retirement plan for 2016 before year end where

necessary

E. Business Planning

1. Equipment purchases

a) Monitor reinstatement of “bonus” depreciation deduction and

act accordingly before year end if it is extended

b) Section 179 first year deduction allowed for up to $25,000 of

qualifying purchases - unless Congress reinstates $500,000

limit.

2. Tangible property rules

a) Understand final IRS regulations which are used to determine

whether certain expenditures related to tangible property are

currently deductible business expenses or depreciable capital

expenditures

(1) Consider safe harbor elections for small businesses and

routine maintenance

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3. Consider cost segregation study for recently purchased, built or

remodeled business building

a) Identifies components that can be currently expensed or

depreciated faster

4. Conduct - and memorialize in writing - year end business meetings of

shareholders and directors

a) Ratify tax planning decisions, e.g., bonuses, retirement plan

contributions, charitable contributions, accounting practices

b) Secure entity level liability protection

F. Miscellaneous Planning to Consider

1. Health Savings Account (“HSA”)

a) Contribute pre-tax income if covered by a qualified high-

deductible health insurance policy

b) $3,350 for self-only and $6,650 (2015)/$6,750(2016) for family

coverage

2. Flexible Spending Account (“FSA”)

a) Reimburses for qualified medical and dependent care expenses

b) $2,550 (2015 & 2016)

c) Check employer plan for $500 rollover and/or 2 ½ month grace

period

3. Income Tax Payment Planning

a) Adjust tax withholdings before year end if estimated tax

payments are not sufficient to avoid penalties

(1) Withholdings deemed paid ratably throughout year

4. Planning with Kids

a) Consider transferring appreciated securities to adult child in 0%

capital gain rate

(1) Beware the kiddie tax!

(2) Can avoid 20% capital gain tax and 3.8% NIIT

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b) Hire your child and contribute to Traditional or ROTH IRA

5. Review State Residency Status

a) Document days in and out of NYS

III. Don’t Forget Year End Estate Tax Reduction Planning

A. Annual Exclusion Gifts (2015 & 2016 - $14,000)

1. Pay tuition and medical expenses

B. Stepped-up basis v. estate tax reduction

C. Valuation discounts for intra-family transfers

1. Constantly under attack

a) President’s Budget Proposals

b) IRS regulations

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Exhibit A

The following charts are borrowed from the 2015 Thomson Reuters Checkpoint™ Tax Planning for Individuals Quickfinder® Handbook.

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MARTIN S. FINN, an attorney and certified public accountant, is a founding partner of the law firm Lavelle & Finn, LLP. Mr. Finn counsels clients on estate, financial, tax, business and elder law issues including personal and corporate tax planning, business counseling, structuring of business transactions, estate administration and estate and business succession planning. A major part of his practice involves assisting elderly clients and their families with tax and legal issues such as maximizing wealth and retirement income, governmental programs (e.g., Medicare and Medicaid) and disability planning including use of durable powers of attorney, supplemental needs trusts, health care proxies and living wills.

Mr. Finn holds a B.B.A. from Siena College (1980), a J.D. from Albany Law School (1983) and an LL.M. in Taxation from New York University (1989). He is a member of the American, New York State, Albany County and Schenectady County Bar Associations; the National Academy of Elder Law Attorneys, Inc.; the American Institute of Certified Public Accountants; and the New York State Society of Certified Public Accountants.

Mr. Finn is a frequent lecturer and, with his partner John H. Lavelle, is co-author of The Complete Trust Course (HalfMoon Education, Inc., 2014), Cents & Sensibility: The Practical Guide to Money & Aging (iUniverse, 2006) and Estate Planning Techniques for Mid-Sized Estates (PESI, 2005).

Mr. Finn is Steering Committee Chair and Conference Chair of the AICPA Conference on Tax Strategies for the High-Income Individual; Conference Chair of the 2015 AICPA Sophisticated Tax Conference; Member of the Board of Directors and Treasurer of the Schenectady County Chamber Foundation; Member of the Board of Managers of Capital Communications Federal Credit Union; Member of the Board of Directors of the Schenectady County Industrial Development Agency; Former Schenectady County Legislator (District 3), 2008-2013; Past Treasurer of Niskayuna Friends of Music; Past Member of the WMHT Planned Giving Advisory Committee; Past Chair of the Chamber of Schenectady County Board of Directors; Past President of the Board of Directors of the Estate Planning Council of Eastern New York, Inc.; Past Member of the Siena College Board of Associate Trustees (Planned Giving Advisory Committee); and Past President of the Board of Directors and Member of the Board of Trustees of the Northeastern New York Chapter of the Alzheimer’s Association, Inc. He has also been an Adjunct Professor at Siena College, Albany Law School and the University at Albany.

Mr. Finn is the 2005 recipient of the Fr. Benjamin Kuhn Award for his contribution to Siena College, the 2001 recipient of the Schenectady County Bar Association’s Lawyer in Service to the Community Award and the 1998 recipient of Professional Education System, Inc.’s Excellence in Education Award.

Martin S. Finnmarty@lavelleandfinn.com

29 British American Blvd.Latham, New York 12110

T: (518) 869-6227F: (518) 869-0572

188 Church StreetSaratoga Springs, NY 12866

T: (518) 584-6300F: (518) 584-5673

Areas of Practice:Trusts & Estates Administration

Elder LawEstate and Tax Planning

Martin S. Finn, CPA, JD, LL.M.