IRS Interest Rates Remain the Same
& Time to Start Year-End Tax Planning
Equity Financing Arrangements
Internal Revenue Service recently announced that interest
rates will remain the same for the calendar quarter beginning
October 1, 2015. The rates will be:
- 3% for overpayments [2% in the case of a corporation];
- 0.5% for the portion of a corporate overpayment exceeding
- 3% for underpayments; and
- 5% for large corporate underpayments.
Under the Internal Revenue Code, the rate of interest is
determined on a quarterly basis. For taxpayers other than
corporations, the overpayment and underpayment rate is the
federal short-term rate plus 3 percentage points.
Generally, in the case of a corporation, the underpayment rate
is the federal short-term rate plus 3 percentage points and
the overpayment rate is the federal short-term rate plus 2
percentage points. The rate for large corporate underpayments
is the federal short-term rate plus 5 percentage points. The
rate on the portion of a corporate overpayment of tax
exceeding $10,000 for a taxable period is the federal
short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the
federal short-term rate determined during July 1 2015 to take
effect Aug. 1, 2015, based on daily compounding.
Now is The Time to Start 2015 Year-End Tax Planning!
federal income tax rates for 2015 are the same as last year:
10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
However, the rate bracket beginning and ending points are
increased slightly to account for inflation.
For 2015, the maximum
39.6% bracket affects
singles with taxable income above $413,200, married
joint-filing couples with income above $464,850, heads
of households with income above $439,000, and married
individuals who file separate returns with income above
Higher-income individuals can
also get hit by the 0.9% additional Medicare tax on wages and
self-employment income and the 3.8% net investment income tax
(NIIT), which can both result in a higher-than-advertised
marginal federal income tax rate for 2015.
What we've listed below are a few money-saving ideas to get
you started that you may want to put in action before the end
For 2015, the standard deduction is $12,600 for married
taxpayers filing joint returns. For single taxpayers, the
amount is $6,300.
If your total itemized
deductions each year are normally close to these amounts, you
may be able to leverage the benefit of your deductions by
bunching deductions, such as charitable contributions and
property taxes, in every other year.
This allows you to time your
itemized deductions so they are high in one year and low in
the next. However, the alternative minimum tax (AMT),
discussed later in this article, should be considered when
using this strategy.
If you or a family member own traditional IRAs and reached age
70½ this year, consider whether it's better to take the
first required minimum distribution in 2015 or by April 1 of
If your employer offers a Flexible Spending Account
arrangement for your out-of-pocket medical or child care
expenses, make sure you're maximizing the tax benefits
during the upcoming enrollment period for 2016.
If you have a 401(k) plan at work, it's just about time to
tell your company how much you want to set aside on a tax-free
basis for next year. Contribute as much as you can stand,
especially if your employer makes matching contributions. You
give up "free money" when you fail to participate with the
maximum amount the company will match.
If it looks like you are going to owe income taxes for 2015,
consider bumping up the federal income taxes withheld
from your paychecks now through the end of the year.
Between now and year end, review your securities portfolio
for any losers that can be sold before year end to offset
gains you have already recognized this year or to get you to
the $3,000 ($1,500 married filing separately) net capital loss
that's deductible each year.
If you own any securities that are all but worthless with
little hope of recovery, you might consider selling them
before the end of the year so you can capitalize on the
loss this year.
Don't overlook estate planning. For 2015, the unified
federal gift and estate tax exemption is a generous $5.43
million, and the federal estate tax rate is a historically
reasonable 40%. Even if you already have an estate plan, it
may need updating to reflect the current estate and gift tax
rules. Also, you may need to make some changes that have
nothing to do with taxes.
If you are self-employed, consider employing your child.
Doing so shifts income (which is not subject to the "kiddie
tax") from you to your child, who normally is in a lower tax
bracket or may avoid tax entirely due to the standard
deduction. There can also be payroll tax savings and the
ability to contribute to an IRA for the child.
If you own an interest in a partnership or S corporation that
you expect to generate a loss this year, you may want to
make a capital contribution (or in the case of an S
corporation, loan it additional funds) before year end to
ensure you have sufficient basis to claim a full deduction.
Remember that effective tax planning
requires considering at least this year and next year.
Without a multiyear outlook, you can't be sure maneuvers
intended to save taxes on your 2015 return won't backfire and
cost additional money in the future.
And finally, watch out for the AMT in all of your planning,
because what may be a great move for regular tax purposes may
create or increase an AMT problem. There's a good chance
you'll be hit with AMT if you deduct a significant amount of
state and local taxes, claim multiple dependents, exercise
incentive stock options, or recognize a large capital gain
Again, these are just a few suggestions to get you thinking.
If you'd like to know more about them or want to discuss other
ideas, please feel free to call us.
Financing Arrangements For Home Ownership
children may be able to acquire a more expensive home than
they might otherwise afford by using a shared equity financing
arrangement, under which parents or other relatives share
in the purchase and cost of maintaining a house used by the
children as a principal residence.
The nonresident owner rents his
or her portion of the home to the resident owner and obtains
the annual tax benefits of renting real estate if the
statutory requirements are satisfied.
Since the child does not own
100% of the home, he or she is the relative's tenant as to the
portion of the home not owned and rents that interest from the
relative at a fair market rate.
A shared equity financing arrangement is an agreement by which
two or more persons acquire qualified home ownership interests
in a dwelling unit and the person (or persons) holding one of
the interests is entitled to occupy the dwelling as his or her
principal residence, and is required to pay rent to the other
person(s) owning qualified ownership interests.
the vacation home rules, personal use of the home by a child
or other relative of the property's owner is normally
attributed to the owner. However, an exception to the general
rule exists when the dwelling is rented to a tenant for a fair
market rent and serves as the renter's principal residence.
When the tenant owns an interest in the property, this
exception to the general rule applies only if the rental
qualifies as a shared equity financing arrangement.
Example: Shared equity financing
arrangement facilitates child's home ownership.
Mike and Laura have agreed to help their son, Bob, purchase
his first home. The total purchase price is $100,000,
consisting of a $20,000 down payment and a mortgage of
$80,000. Mike and Laura pay half of the down payment and make
half of the mortgage payment pursuant to a shared equity
financing agreement with Bob. Bob pays them a fair rental for
using 50% of the property, determined when the agreement was
Under this arrangement, Bob treats the property as his
personal residence for tax purposes, deducting his 50% share
of the mortgage interest and property taxes. Because his use
is not attributed to his parents, Mike and Laura, they treat
the property as rental. They must report the rent they receive
from Bob, but can deduct their 50% share of the mortgage
interest and taxes, the maintenance expenses they pay, and
depreciation based on 50% of the property's depreciable basis.
If the property generates a tax loss, it is subject to, and
its deductibility is limited by, the passive loss rules.
One drawback to shared equity arrangements is that the
nonresident owners will not qualify for the gain exclusion
upon the sale of the residence. The result will be a taxable
gain for the portion of the gain related to the deemed rental.
The gain may also be subject to the 3.8% net investment income
tax (NIIT). Parents should consider guaranteeing or cosigning
the mortgage, instead of outright joint ownership, if
excluding potential future gain is a major consideration.
If it is anticipated that the resident owner will ultimately
purchase the equity of the nonresident owner and the rental
will generate losses suspended under the passive loss rules,
special care must be taken when the lease terms are agreed to,
because suspended passive losses normally allowed at
disposition are not allowed when the interest is sold to a
related party. This problem can be minimized by making a
larger down payment that decreases mortgage interest expense,
or by charging a rent at the higher end of the reasonable
range for the value of the interest being rented to the
Remember you can
call our offices if you have any questions about these or any
other accounting, tax, financial planning or insurance related
issues, at 313-388-0300 or our other area offices listed
Regards, Philip Schreiber, CPA
Schreiber Advisors, PC