Taxman cometh: Changes taking effect in 2015

There are many important tax changes taking effect in 2015. They are the result of the Tax Increase Prevention Act of 2014 as well as other tax legislation and inflation-indexed changes.

Below are highlights of key tax changes that primarily affect individuals and businesses for the current year.

One-IRA-rollover-per-year rule.

An individual receiving an IRA distribution on or after Jan. 1, 2015, cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding one-year period that was rolled over into an IRA.

Under previous rules, the one-rollover-per-year limitation applied on an IRA-by-IRA basis.

The change was precipitated by a Tax Court’s decision which applies on an aggregate basis, meaning that an individual could not make more than one nontaxable 60-day rollover within each one-year period even if the rollovers involved different IRAs, including SEP, SIMPLE IRAs and ROTH IRAs.

Retirement contribution limits.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), and most 457 plans, increases to $18,000 (up from $17,500 in 2014). The defined contribution plan limit for 2015 increases to $53,000 (up from $52,000 in 2014).

ABLE accounts for the disabled.

For tax years beginning after Dec. 31, 2014, TIPA allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts to assist persons with disabilities in building an account to pay for qualified disability expenses. Similar to a Qualified Tuition Plan, a tax exemption is allowed for an ABLE program. Amounts in an ABLE account accumulate on a tax-exempt (or, in some cases, tax-deferred) basis, and distributions are tax-free if made for “qualified disability expenses.” Except in the case of a rollover contribution from another account, an ABLE program must limit the aggregate contributions from all contributors for a tax year to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015, adjusted annually for inflation).

Health Savings Accounts (HSAs).

For the calendar year 2015, an HSA holder can choose to save up to $3,350 for an individual and $6,650 for a family (HSA holders 55 and older can contribute an extra $1,000).

Increase in standard mileage rates. The IRS has updated the standard mileage rates that are used to calculate the deductible costs of operating an automobile for business and medical/moving purposes. The new rates were effective January 1, 2015.

Health insurance coverage.

Beginning in 2015, unless you are covered by an exemption, you are required to maintain basic health insurance coverage (known as minimum essential coverage) for yourself and any of your dependents, or pay a penalty. The penalty in 2015 is calculated one of two ways. If you or your dependents do not have health insurance that qualifies as minimum essential coverage, you’ll pay the greater of $325 per uninsured adult ($162.5 per child under 18) with a maximum penalty per family up to $975 or 2 percent of your household income, capped at the national average premium for a bronze plan.

For 2015 and after, some employers will be subject to new Employer Shared Responsibility provisions from the Affordable Care Act.

Employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provisions. An employer identifies its full-time employee based on each employee’s hours of service. An employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week or 130 hours of service in a calendar month.

Managing your adjusted gross income.

Many tax deductions and credits are subject to AGI-based phase-out, which means only taxpayers with AGI below certain levels benefit. (AGI is the amount at the bottom of page 1 of your Form 1040—basically your gross income less certain adjustments (i.e., deductions), but before itemized deductions and the deduction for personal exemptions.) Unfortunately, however, the applicable AGI amounts differ depending on the particular deduction or credit.

Estate and gift tax.

For 2015, the unified federal gift and estate tax exemption is at $5.43 million, and the federal estate top tax rate is at 40 percent. Also, if you’re planning to make nondeductible gifts to friends or family members before December 31, 2015, keep in mind you can give only $14,000 ($28,000 when combined with your spouse) to an individual without generating gift tax implications.

Expired tax provisions.

Despite being routinely extended by Congress on a one or two year basis, the following popular tax provisions expired at the end of 2014:

State and local sales taxes deduction. Election to deduct state and local general sales taxes instead of state and local income taxes.

Cancellation of debt (COD) mortgage debt. Exclusion of COD income (up to $2 million; $1 million if married filing separately) when principal residence debt is canceled.

Educator’s expenses. Above the line deduction (up to $250) for out-of-pocket costs incurred by grades K-12 teachers, instructors, counselors, principals and aides.

Mortgage insurance premiums deduction. Treatment of qualified mortgage insurance premiums as home mortgage interest for taxpayers with AGI up to $109,000 ($54,500 if married separately).

Personal energy property credit. Credit (subject to a $500 lifetime cap) for qualified energy efficiency improvements and expenditures to a taxpayer’s principal residence.

Tuition and fees deduction. Above the line deduction for tuition and fees for qualified higher education expenses.

Qualified charitable distributions. Ability for taxpayers over age 70 1/2 to make tax-free transfer from an IRA directly to a charity. Any amounts so transferred counted toward the individual’s required minimum distribution, but were not deductible as charitable contributions.

Section 179 deduction. For years after 2014, the deduction and qualifying property limits fall from $500,000 and $2,000,000 to $25,000 and $200,000, respectively.

Special (bonus) depreciation. The special depreciation allowance is not available for property acquired after 2014.

Work opportunity tax credit.

Tax credit for research and experimentation expenses.

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

Dan Clausen, CPA, is a shareholder with Clausen & Company. With more than 40 years of experience in northern Nevada, the business specializes in serving privately held companies, individuals and families. For more information, visit www.clausencpas.com.