Withum Offers Year-End Planning Moves to Help Lower One’s Tax Bill

As the end of the year approaches, it is a good time to think of planning moves to help lower this – and possibly next – year’s tax bill, according to the professionals at WithumSmith+Brown (Withum), an accounting, audit, tax and advisory firm with 12 office locations, including New York City, Philadelphia and Morristown, New Brunswick, Paramus, Princeton, Red Bank and Toms River.

Factors that compound this challenge include turbulence in the stock market, overall economic uncertainty and Congress’ failure to act on a number of important tax breaks that expired at the end of 2014. “Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year. However, Congress may not decide the fate of these tax breaks until the very end of 2015 or later,” said David A. Springsteen, CPA, MBA, partner and practice leader of Withum’s National Tax Services.

Among these breaks for individuals are the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up to $2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include a 50 percent bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

“For higher-income earners, there are unique concerns to address when mapping out year-end plans,” added Springsteen. “These individuals must be wary of the 3.8 percent surtax on certain unearned income and the additional 0.9 percent Medicare (hospital insurance, or HI) tax.”

The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

With regard to the former, the surtax is 3.8 percent of the lesser of either the net investment income (NII) or the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8 percent surtax will depend on the estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (for example, through deferral) additional NII for the balance of the year; others should try to see if they can reduce MAGI other than NII. Others will need to consider ways to minimize both NII and other types of MAGI.

On the Medicare front, the 0.9 percent additional tax also may require year-end actions as well. “Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income,” said Springsteen, who noted self-employed persons also must take this into account in figuring estimated tax and there could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. “For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax. However, there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.”

Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

Established in 1974, Withum is committed to providing quality services and innovative solutions to businesses, non-profits, individuals and communities. The firm provides clients with the benefits of a larger organization without compromising the attention and personal service associated with a local business. As one of the nation’s 30 largest accounting and consulting firms, Withum’s annual revenue is approximately $115 million. The firm also is a member of HLB International, a worldwide network of independent professional accounting firms and business advisors committed to assisting clients build and expand globally.

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