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Significant U.S. Tax Changes for 2015 (2016 Filing Season)

Proposed Tax Changes in President Obama’s Fiscal Year 2016 Budget:

Although these are not law yet, the following proposals, some of which may have a major effect on the economy have been proposed:
– Increase of the top capital gains rate from 23.8% to 28%;
– Elimination of stepped up basis on death;
– Implementation of the “Buffet Rule” to tax high income earners a minimum of 30%;
– Imposition of a Bank Tax of .07% on bank liabilities over $50 billion;
– Increase Estate Tax to 45%;
– Reduce estate tax exemption to $3.5 million;
– Disallow retirement savings once retirement account reaches $3.4 million;
– Levy self employment tax on all pass through business income (like S corporations);
– Reduce foreign tax credit to 85% of foreign taxes paid;
– Tax foreign earnings at a minimum of 10%, regardless of the earned income exclusion;

Affordable Care Act

Under the Affordable Care Act, the federal government, state governments, insurers, employers, and individuals are given shared responsibility to reform and improve the availability, quality, and affordability of health insurance coverage in the United States. Starting in 2014, the individual shared responsibility provision calls for each individual to have minimum essential health coverage (known as minimum essential coverage) for each month, or qualify for an exemption. Otherwise, they are required to make a payment when filing their federal income tax return.

The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption

The provision went into effect on Jan. 1, 2014. It applies to each month in the calendar year. The amount of any payment owed takes into account the number of months in a given year an individual is without coverage or an exemption.

For 2015 the penalty for not having health coverage has increased to $285 per adult or 2% of income over threshold.

General Tax Provisions:

Income tax returns are due this year on April 18, 2016 unless an extension is filed and taxes are paid by that date.

Increased Scrutiny

Again this year, Internal Revenue Service has increased its scrutiny of returns filed, to ensure that fraudulent claims and false deductions are less likely to be missed. The following areas on a return are likely to increase audit scrutiny:

Amount of earnings – Normally about 1% of returns are audited but if income is over $200,000 have a 3.7% chance of audit, while income over $1,000,000 increases the likelihood of audit to 12.5%;
IRS have increased matching of 1099 and W2 information to returns, and are likely to issue an audit letter if it appears that an item of income has been missed;
Large charitable donations or itemized deductions increase the likelihood of audit; It is important to maintain adequate records to support all deductions;
Real estate losses, and “real estate professionals” have been targeted for additional scrutiny;
Business meals, travel and entertainment are a favorite target of IRS audits;
Claiming too high a vehicle business use percentage can lead to an audit;
Filing a business statement showing a large loss consistently, is likely to cause IRS to challenge the business as a “hobby” where losses are not deductible;
Cash businesses continue to be a favorite audit target;
Any Taxpayer with foreign bank or financial assets is an increased target. IRS has recently been very successful in levying penalties for late, absent, or inadequate reporting of foreign assets and income.
IRS has been directed to look more closely at any situation where a Taxpayer has foreign currency transactions in excess of $10,000 reported by banks.

As a result of the likelihood for increased government scrutiny of all returns filed, we have this year implemented our “Prepaid Audit Assurance Program”. Under this Program, we cover the costs of representation in the event you are audited.

Summary of 2015 Changes for Individuals

The following changes from 2014 have been maintained for 2015:

A new tax bracket of 39.6% has been applied to taxable income in excess of $400,000 (single) or $450,000 (married filing jointly) – This represents a 13.1% increase.
Capital gains will be taxed at 20% for taxpayers in the new high bracket.
Net Investment Income Tax (NIIT) of 3.8% will be based on investment income and reported on form 8960 and will affect U.S. citizens and residents only, where income exceeds 200,000 (single) or $250,000 (married filing jointly) or $125,000 (married filing separately). For NIIT purposes, net losses from property dispositions cannot be less than zero (and therefore cannot offset other investment income).
Itemized Deductions (except for medical and investment expenses) will be phased down by 3% of the income over threshold as noted below.
Personal exemptions are phased out totally by 2% of income above thresholds.
Medical and dental expenses must exceed 10% of adjusted gross income to be counted as itemized deductions.
A new .9% Medicare Tax is payable on earned income over the above thresholds used for NIIT on new form 8959.

Individuals must file 2015 Income tax returns at these levels.
Single individual (also individuals treated as unmarried for tax purposes $10,300
Single individual, 65 or older $11,850
Married individual, separate return $4,000
Married couple, joint return $20,600
Married couple, joint return, one spouse 65 or older $21,850
Married couple, joint return, both spouses 65 or older $23,100
Head of household $13,250
Head of household, 65 or older $14,800
Qualifying widow(er) (surviving spouse) $16,600
Qualifying widow(er) (surviving spouse), 65 or older $17,850

Basic standard deduction amounts for 2015 (subject to phase out as noted above):
Filing status 2015 standard deduction amount
Married filing jointly and surviving spouses $12,600
Married filing separately $6,300
Head of household filers $9,300
Single filers $6,300

The 2015 personal exemption is $4,000
“Kiddie” tax amount for 2015 is $2,100
The 2015 standard mileage rate for all business use of a car is 57.5 cents per mile
Per diem rates under the high-low method of substantiating lodging & meals expenses are at $275 for high-cost localities and $185 for low-cost localities.
The transportation fringe benefit exclusion amount for employer provided transit passes is $130 per month and for employer-provided parking is $250 per month.
The FICA and self-employment maximum earnings for 2015 are $118,500.

Please contact us to review the impact of these or other changes as they may apply to your specific situation.

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