The absence of earth-shattering headlines about major tax code revisions in 2015 doesn’t mean there were no changes that could, and should, impact your tax planning. In fact, several changes and significant court rulings occurred, which particularly affect high net worth individuals. Here is a rundown of the ones you need to be aware of for 2016.
RETIREMENT AND ESTATE PLANNING
Several changes pertaining to IRA contributions could impact retirement planning. As of 2015, taxpayers were able to contribute up to $18,000 to their 401(k), 403(b) and most 457 plans. The “catch-up” contribution limit was also increased to $6,000. So, in effect, in 2015 the total contribution limit for employees age 50 and older increased to $24,000. These amounts will remain unchanged in 2016. The “estate tax exclusion,” meanwhile, continued to rise. As of 2015, an estate can be worth $5.43 million before becoming subject to federal estate tax. This amount will go up slightly to $5.45 million in 2016.
Besides tax changes, several tax cases in 2015 bear watching. Regardless of anyone’s stance on same-sex marriage, there has never been a single ruling that affected tax law and federal benefits more than the Supreme Court’sruling in Obergefell v. Hodges. Whereas same-sex couples living together previously relied on trust agreements, domestic partnership agreements and powers of attorney to protect benefits and assets, anyone legally married can now enjoy all federal tax benefits and rights under the 1996 Defense of Marriage Act.
A less emotionally charged, yet still significant, tax ruling in 2015 involved so-called “double taxation.” In the case of Comptroller v. Wynne, the Supreme Court ruled 5–4 that Maryland’s income tax law was unconstitutional because it subjected some of the state’s residents to “double taxation.”
Basically, Maryland and other states had allowed residents tax credits for taxes paid to other states at the state level—but not at the city or local level; the Court declared this unconstitutional. As a result, Maryland now owes the Wynnes and other similar taxpayers refunds and interest totaling about $200 million. The ruling has implications in other states that leverage similar local taxes, including Indiana, New York and Pennsylvania.
It was announced in 2015 that the IRS planned to issue regulations that will significantly limit, or potentially even eliminate, “valuation discounts” used to mitigate estate taxes. Valuation discounts can be a key factor in estate planning, particularly for families with “closely held” entities that represent a substantial amount of the family’s wealth.
Another high-impact case this year involved “transfer pricing.” Transfer pricing is the practice of establishing a price for the exchange of goods and services between two related legal entities within an enterprise. In recent years the IRS had become concerned regarding such transactions. Microsoft and Amazon, for example, are high-profile multinationals involved in ongoing cases regarding transfer pricing. Observers take this as evidencethat the IRS continues to increase its scrutiny of such practices.
Last but not least, in 2015 the IRS proposed unfavorable regulations on management-fee waivers with respect to private equity management fees.
The trend we see here is the IRS and Congress doing away with the beneficial carried interest taxation rules that have benefited high net worth taxpayers for decades.
What can you expect in the year ahead? No one has a crystal ball, but there are certain trends we expect to continue. These include ongoing scrutiny by the IRS regarding valuation discounts, transfer pricing, carried-interest taxation and other strategies typically used to minimize tax obligations.
With the impending presidential primaries and elections, and varying tax-simplification proposals from both sides of the aisle, 2016 is sure to be both active and unpredictable.
This article was originally published in the December/January 2016 issue of Worth.