Whether you are having a good year or are rebounding from losses, better news is on the horizon — for Hawaii income tax, anyway. The top rates of 9, 10 and 11 percent go away at the end of 2015. The top rate effective as of the beginning of next year is 8.25 percent. So the usual advice regarding acting before Dec. 31 to defer your income and increase your deductions would be especially true for you this year if you are subject to one of the higher brackets.
For example, suppose you have some stocks and bonds that you are thinking of selling. If your basis is lower than the market price, then the sale will produce a gain. If you’ve held the assets for more than a year and the gain will be long-term capital gain, then the top rate on that income will be 7.25 percent whether you take the income in 2015 or 2016. If you haven’t held the assets that long, your gain will be taxed at ordinary income rates, so if you are now exposed to one of the top brackets you might want to wait until next year to take the gain. Similarly, if you have assets with built-in losses and you have already realized short-term gains for 2015, you might consider selling this year so that the losses will cut down your short-term gains.
Another strategy to lower net income for 2015 is to take some last-minute tax deductions. Charitable giving is one way to do that. If you donate some cash to your favorite charity in 2015, you get a deduction in 2015. Or, what could be even better, if you have been thinking of selling stocks that would produce capital gain, maybe you can give them to your charity instead of giving cash. You get a deduction for the full market value of the stock when you give it, you don’t get taxed on the gain because you haven’t sold the stock, and the charity doesn’t get taxed on the gain either whether it sells the stock. (By the way, make sure the charity gives you a receipt.) Another possibility is for you to make your last quarter payment of state estimated tax in December rather than January so you can deduct it in 2015 rather than 2016, but be sure to speak to your tax adviser first because the federal alternative minimum tax could give you an unpleasant surprise.
A tax-deferred retirement plan is another way to reduce your 2015 income. You can deduct up to $5,500 ($6,500 if you are age 50 or older) for contributing to an IRA. If you are employed and your company sponsors a retirement plan, you might be able to defer more under a 401(k) plan; and if your company matches a portion of your deferrals you could get even more bang for your bucks.
We wrote last year about the “tax cliffs” in the Hawaii income tax law that kick in once adjusted gross income reaches $200,000 for married taxpayers or $100,000 for single ones. In particular, there is one provision that disallows any deduction for state taxes, another one that limits most itemized deductions to a fixed amount, and a third that reduces itemized deductions 3 percent for each dollar of federal AGI in excess of a certain amount. Those three provisions are still with us in 2015, so if your deferral of income or acceleration of deductions gets you under the threshold and out of their jaws, you will reap yet another benefit. (The itemized deduction cap dies at the end of 2015, but the other two provisions continue.)
Individuals’ circumstances differ, and there may be other provisions affecting your taxes even though we didn’t have the space to discuss them here. So one component of your year-end tax planning should be to discuss your situation with a tax professional.
Tom Yamachika is president of the Tax Foundation of Hawaii.