Tax Filing Season and Tax Law Changes for 2015

Tax laws undergo some minor changes every year, such as inflation adjustments, renewal of deductions, new taxes, and tax increases. As the 2015 tax filing season has started, it is important to stay informed on the latest changes to the tax code and how they can affect you. This article will explore three key areas where some of the biggest changes have been made to the Internal Revenue Code (IRC).

Affordable Care Act Changes for 2015

The Affordable Care Act is the law of the land that requires most individuals to have health insurance or risk paying a tax penalty. Per the federal health law’s individual mandate, individuals above certain income thresholds should get health insurance coverage if they are not covered by public programs such as Medicare and Medicaid. If health coverage is not supplied through his or her job, an individual may choose to purchase an individual private policy or get covered under the state-operated insurance marketplace.

Those who do not have the minimum level of coverage should be wary because they will be subjected to IRS penalties at the end of the tax year. Here is a brief summary of the non-compliance penalties: the penalty for the 2014 tax year is one percent of income for both individuals and families or $95 for single adults and $285 for families, whichever is greater. This may not seem bad at all when compared to insurance premiums; however, the fact is, the penalty structure is formulated to increase over time. In 2015, the fine will rise significantly to $325 per adult and up to $975 for a family or 2% of income. In 2016, the penalty will be sky high: $695 per individual and $2,085 for a family or 2.5% of income.

Small-business owners obtaining insurance through the Small Business Health Options Program (SHOP) marketplace can qualify for tax credits and tax breaks. Businesses that employ less than 25 full-time workers and pay average annual salaries of less than $50,000 can make use of this program for group health coverage. Per ObamaCare’s employer mandate, businesses with more than 100 full-time employees will have to provide health coverage to at least 70% of their workers starting in 2015. This rule does not apply to companies with 50 to 99 full-time workers until Jan 1, 2016.

New Limits on IRA Rollovers in 2015

Finally, some good news from the IRS! Contribution limits to 401(k), 403(b), and other qualified retirement plans have now increased by $500, bringing them to $18,000 in 2015. The catch-up contribution limit for individuals who are 50 or older has also increased by $500.

A new year ushered in a new rule from the IRS that put restrictions on the number of IRA-to-IRA rollovers. Starting in 2015, taxpayers can do only one rollover in a 12-month period, irrespective of how many IRAs the individual has. A second 60-day IRA-to-IRA rollover could result in a 10% early withdrawal penalty, and the distribution will be subject to taxation. The old rules allowed individuals to do one such rollover per year for each IRA that they owned, which created penalty-free and interest-free loans. Sadly, the new change limits taxpayers from taking such tax-free rollover provisions.

There is no reason to be alarmed, since this new rule change does not apply to traditional IRA to Roth IRA conversions or trustee-to-trustee transfers. This direct rollover transfer method lets investors transfer funds any number of times between IRA accounts without taking control of the money. This transfer is tax-free and does not trigger the 10% early withdrawal penalty. Get expert guidance if you hold multiple IRA accounts and are planning to do transfers but are not confident about whether they fall within the rollover limit or the distribution is tax-free.

2015 Tax Rates and Other Inflation Changes

For 2015, inflation-based adjustments are made for all tax brackets: the top 39.6% tax bracket, for example, will start at $413,200 for unmarried filers (up from $406,750 in 2014) and $464,850 for married joint filers (up from $457,600). The standard deduction for the 2015 tax year is $6,300 for single filers and $12,600 for married joint filers. The personal exemption gets an increase of another $50 to $4,000 in 2015. Individuals in the 25%, 33%, and 35% federal income tax brackets will pay the same 15% on capital gains, but taxpayers in the 39.6% bracket will have to pay more, as they will now be taxed at a 20% rate on long-term capital gains.

Fiduciary Duty

Fiduciary duty-two simple words, yet oh so powerful. Many different types of professionals owe a fiduciary duty to someone-for example, lawyers to their clients, trustees to their beneficiaries, and corporate officers to their shareholders.Two Critically Important: The U.S. Supreme Court has determined that financial advisers registered under the Investment Advisers Act of 1940 (“Act”) are fiduciaries. The word fiduciary comes from the Latin word for “trust.” A fiduciary must act for the benefit of the person to whom he owes fiduciary duties, to the exclusion of any contrary interest.

Many financial services companies intentionally avoid registering their financial advisers under the “Act” for one simple reason-to avoid fiduciary duty.

That is right-they do not want to be obligated by law to act in the best interest of clients. Let us go back to the example of the financial adviser who recommended the higher cost, higher commission mutual fund. If the financial adviser were registered under the Act the financial adviser would be obligated to act in the best interest of the client and would be obligated to recommend the lower cost solution.

Interestingly, the financial adviser would be prohibited by law to accept a commission. That is right. A financial adviser registered under the Act is legally called an Investment Adviser Representative (IAR) and must work for a company legally called a Registered Investment Adviser (RIA). Neither an IAR nor an RIA is permitted from being compensated by commission. Rather, both can be only compensated by fees.

Imagine lying on the operating room table as your neurological surgeon is evaluating which scalpel to use on your left frontal lobe of your brain for your procedure. Scalpel one is made by a company that pays him a higher commission than the company that made scalpel two. Preposterous? Not in the context of how many financial advisers “operate.”

An RIA and the firm’s IARs are obligated by law to act in the best interest of clients and are compensated with fees-just like a neurological surgeon. Many fee arrangements are tied to the value of assets being managed. This creates an equitable relationship with you and your IAR. If your assets increase in value your fees increase, as your assets decrease in value your fees decrease. It sounds fair because it is.

So, how do less reputable firms get around this “problem”? They register as an RIA, yet are very careful to register the RIA business as ancillary to their overall business. If the RIA business is ancillary to their overall business (which may include investment banking, broker dealer, merchant bank, banking, and so forth), then they can mitigate their fiduciary duty.

Which brings us to a simple solution to all these conflicts and qualifications, like Mom used to say, “Get it in writing!” If you want the investment firm you are dealing with to place your client’s interests above and beyond their interests, have them clearly accept fiduciary duty in writing on their company letterhead.

Don’t be surprised if your financial adviser says “that’s not necessary,” or “that’s essentially what it says on page 1,847 of the contract you signed,” or “our compliance department prohibits that.”
Protect yourself. Have the firm give you a simple letter signed by a principal of the company.

In summary, the selection and utilization of a financial adviser is as important as the selection and utilization of a surgeon. You should understand their academic background, credentials, and experience.

Unfortunately, your due diligence does not end there. As discussed in this chapter, you must understand whether your financial adviser will accept fiduciary duty in writing, on company letterhead. Lastly, understand what conflicts of interest that acceptance may have if the financial adviser’s employer is a public company-obligated by law to place shareholders’ interests above your own. Remember, it’s your wealth-not their wealth.