There has been very little in the way of federal and New Jersey tax law changes for 2015. And with 2016 being a major federal election year, one would not expect any significant changes to the tax code next year. The next occupant of the White House will likely look to enact some degree of tax reform in 2017, similar to what President Bush did in 2001 and what President Obama did in 2009.

Individuals can avoid incurring an underpayment of estimated tax penalty by having their 2015 income tax payments reach the lesser of two thresholds. For federal purposes, one must pay the lesser of 110% of their 2014 tax liability (safe harbor) if their 2014 adjusted gross income (AGI) exceeded $150,000 ($75,000 if filing status is married separate), or 90% of their 2015 tax liability. If prior year AGI was below $150,000, then the safe harbor percentage is 100%. For New Jersey, one must pay the lesser of 100% of their 2014 tax liability, or 80% of their 2015 tax liability.

Taxpayers that have the ability to generate withholding, typically from wage income, can catch up before the end of the calendar year via accelerated withholding. All withholding is treated as paid ratably throughout the year regardless of when the withholding occurred. Owners and officers of closely held corporations can receive year-end bonuses that largely go to tax withholding to avoid incurring underpayment penalties. Owners of partnerships, including LLCs, are not employees and should not be paid wages.

Quarterly estimated tax payments are due on prescribed due dates. Fourth quarter 2015 estimated tax payments are due January 15, 2016. If a taxpayer can avoid being subject to the Federal Alternative Minimum Tax (AMT), then it will often be beneficial to prepay any fourth quarter state estimated tax payment(s) by the end of December in order to obtain the federal income tax deduction for 2015. If subject to AMT, no benefit is obtained from making the fourth quarter state estimated tax payment(s) in December, and therefore, defer payment until January 2016. There is no need or reason to remit a fourth quarter 2015 federal estimated tax payment in December.

A focus area for potentially lowering 2015 personal income tax liabilities is capital gains and losses. If a taxpayer has already realized significant capital gain income for 2015, they might consider selling any items in their portfolio with unrealized losses in order to trigger those losses as an offset against the capital gain income. For New Jersey, one never wants to be in a situation with an overall capital loss since no carryforward is permitted. If there are year-to-date capital losses, consider generating capital gains to utilize the losses. For federal purposes, a $3,000 capital loss deduction is permitted with a carryover of any additional capital losses indefinitely.

Retirement contributions remain a valuable deduction. For 2015, an employee can contribute up to $18,000 to a 401(k) plan, and if over age 50, an additional $6,000 for a total of $24,000. Those with self-employment income can make contributions to a Keogh plan or SEP of up to $53,000 on earned income of $265,000. If a charity is seeking a sizable donation, consider donating an appreciated security. The deduction is based on the fair market value of the asset on the date donated, and you escape being taxed on the unrealized gain as long as the asset qualifies as long-term capital gain property – held more than one year.

Neil Becourtney, CPA
CohnReznick LLP