2015 Year-End Planning
Is It the Calm Before the Storm?
With an election year ahead of us, conventional wisdom holds that near term significant tax reform is very unlikely. But, rest assured, we’ll still hear plenty of rhetoric as several candidates have already presented their plans as talking points. Considering that, combined with the inevitable rise in interest rates, our general view is that now may be the best opportunity to refocus on current holdings, tax structures, and explore the related planning opportunities that are available under current tax law and interpretations while they still exist. With a nod to David Letterman in his retirement, here is a “Top 10 List” of our recommended considerations during this year-end planning cycle, as well as an update of the handful of laws which have passed this year with tax implications:
10. Investment Interest Expense
As a general rule, interest paid on investment debts is deductible, but only up to the amount of Net Investment Income. With the introduction of the Net Investment Income Tax (“Obamacare Tax”) in 2013, some odd interactions often occur between it and AMT and a simple election can often result in significant tax savings.
Here’s how it works. Because certain itemized deductions are disallowed for AMT, the deduction limitation on investment interest expense is often notably lower for regular tax purposes compared to AMT. The limited investment interest expense is carried over to the following year(s) for regular tax purposes. In particular years, by electing to include long term capital gains and qualified dividends in Investment Income, a taxpayer can increase their investment interest limit in that year. Interestingly, the resulting benefit can be a substantial reduction in the Net Investment Income Tax, not the regular tax. Many considerations go into when the election is most advantageous, and therefore lots of scenarios need to be considered.
What did we do before we had computer technology to handle these complex alternative computations?
Senior Managing Director