1. Joint vs. Separate Returns
One of the first decisions for a married couple to make is whether to file jointly or separately. Most couples will fare better with a joint return, but that’s not always the case.
For example, one spouse might have a disproportionately high amount of casualty losses or deductible medical or miscellaneous expenses. Due to the floors for those deductions, which are based on adjusted gross income (AGI), the couple collectively may benefit from filing separately. However, this election could affect other line items on your tax return, so discuss it with your tax adviser before deciding.
2. Sales Tax Deduction
Under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), the deduction for state and local sales taxes has been made permanent and is available for 2015.
The sales tax deduction may be elected in lieu of deducting state and local income taxes. You can write off sales tax based on your actual receipts or use a more convenient state-by-state table. If you opt for the table, you can add sales tax paid in 2015 on certain “big-ticket items,” such as cars and boats.
Electing to deduct sales tax is a no-brainer for residents of states with no state-level income tax. But other taxpayers should discuss the option with their tax advisers first.
3. Education Credits vs. Tuition and Fees Deduction
If they qualify, parents with children in college normally will choose to claim one of these higher education tax credits:
- American Opportunity Tax credit (up to $2,500 per student), or
- Lifetime Learning credit (up to $2,000 per tax return).
Both credits are subject to phaseouts based on modified adjusted gross income (MAGI).
Through 2016 and retroactive to 2015, the PATH Act also revives an alternative deduction for tuition and related fees. This deduction, also subject to a MAGI phaseout, is either $2,000 or $4,000.
Typically, an education credit will provide greater tax savings, because it reduces taxes dollar for dollar. A deduction reduces only the amount of income that’s subject to tax. But the eligibility requirements for these education breaks vary. So multiple factors should be reviewed with a tax adviser before determining which break to claim.
4. Investment Interest Deductions
The tax law allows you to deduct investment interest expenses up to the amount of net investment income for the year. For this purpose, “net investment income” — not to be confused with the definition of this term for purposes of the 3.8% net investment income tax — normally doesn’t include long-term capital gains. For 2015, the maximum tax rate for such gains is only 15% (20% for upper-income investors).
But you can elect to include long-term capital gains in the net investment income total to the extent you forgo the favorable tax rate for those particular gains. Your tax adviser can run the numbers to determine whether this tax election will save you taxes overall.
5. Installment Sales
If you sell real estate, private business interests or other assets in installments spanning two or more years, the tax liability is spread out over the years in which you receive payments. In effect, installment sales allow you to postpone the tax due on a sale — and they also may possibly reduce your overall tax bill on the sale.
Installment sale tax treatment is automatic if you receive payments over two or more tax years. However, if it suits your personal needs, you can elect to pay the entire tax due in the year of the sale. This might be preferable on a 2015 return if you expect to be in a higher tax bracket in future years.
6. Home Office Deductions
Typically, a self-employed individual who runs his or her business from home may qualify for a home office deduction. He or she may be entitled to expenses directly attributable to the home office, plus a portion of the entire home’s expenses based on the percentage of business use of the home.
However, instead of keeping detailed records, you can elect to use a simplified method equal to $5 per square foot of the home office, up to a maximum of $1,500. In most cases, the actual expense method produces a bigger deduction, based on the expenditures. So, keeping track of actual costs could be worth the extra work.
7. Standard Mileage Rate
If you use your personal vehicle for business purposes, you may be eligible to write off a portion of your actual expenses based on business use, plus a depreciation allowance. But tracking actual expenses requires detailed recordkeeping for every business trip and documentation of all expenses.
Alternatively, you can use an IRS-approved standard rate deduction with fewer recordkeeping requirements and add business-related parking fees and tolls. The standard rate for 2015 is $0.575 per business mile (dropping to $0.54 in 2016). However, the standard rate isn’t available if you previously claimed accelerated depreciation for the vehicle.
8. Section 179 Deductions
The PATH Act makes permanent the $500,000 maximum deduction for expensing eligible business property under Section 179. The deduction begins to phase out when purchases of such property exceed $2 million for the year.
These figures apply to 2015 and will be indexed for inflation in the future. They provide self-employed individuals with plenty of room to plan ahead. You can make the Section 179 election to currently expense costs — as opposed to gradually depreciating assets over time — for both new and used property.
9. Child’s Tax Return
If your child has taxable income, he or she may be required to file a tax return, even if the child is a minor. Furthermore, the “kiddie tax” is triggered if a dependent child under age 24 has unearned income exceeding $2,100 in 2015. This results in the excess unearned income being taxed at the parents’ top marginal tax rate.
You can simplify matters by electing to report the child’s income on your own return, instead of hassling with a separate return. But be aware that combining income on one return could have other tax repercussions.
10. Filing for an Extension
Last, but not least, you may find that the filing deadline is fast approaching and you haven’t completed your 2015 return yet — especially if you’re still weighing some of the tax elections discussed above. Fortunately, you can gain more time by requesting a filing extension. The extension is automatic until October 17, 2016 — no questions asked by the IRS.
But be aware that this is only an extension to file your tax return, not an extension to pay tax. In other words, the IRS expects you to make a reasonable estimate of taxes due and pay that amount to the IRS no later than April 18. (Even if you comply with that requirement, you could still be subject to interest and penalties if you didn’t pay sufficient tax throughout the year via withholding and/or estimated tax payments.)
Important note: Before making any of these 10 elections, contact your tax adviser to perform a side-by-side comparison of your options and discuss the pros and cons. That way, you can make a fully informed decision.