2014 Year-end Tax Planning Reminders
Year-end planning will be more challenging than normal this year. Unless Congress acts, a number of popular deductions and credits expired at the end of 2013 and won’t be available for 2014. For example, it appears likely that the expensing allowance for business property and equipment will be raised to a higher amount than the current $25,000 allowance for 2014 – but whether it will be raised to the 2013 level of $500,000 or some lower amount is not yet known.
Other items that have expired and are waiting on Congress include the above-the-line deductions for tuition and educator expenses, generous bonus depreciation and qualified charitable distributions that allow taxpayers over age 70 1/2 to make tax-free transfers from their IRAs directly to charities.
Of course, Congress could revive some or all of the favorable tax rules that have expired as they have done in the past. What actions Congress will take remains to be seen.
Before we get to specific suggestions, here are two important considerations to keep in mind.
1. Remember that effective tax planning requires considering both this year and next year – at least. Without a multiyear outlook, you can’t be sure maneuvers intended to save taxes on your 2014 return won’t backfire and cost additional money in the future.
2. Be on the alert for the Alternative Minimum Tax (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, exercised incentive stock options, or recognized a large capital gain this year.
3. Remember if you believe that you are coming up short with federal income tax payments an option is to increase your payroll tax withholdings in December to cover any anticipated shortfall. This may help reduce underpayment penalties and interest.
Here are a few more tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.
Year End Moves for Your Business
Employ your Child
If you are self-employed, don’t miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket There can also be payroll tax savings since wages paid by sole proprietors to their children under age 18 are exempt from social security and unemployment taxes. Your children will also have earned income, which enables them to contribute to an IRA. The compounded growth in an IRA started at a young age can be a significant jump start to the child’s retirement savings.
1. wages paid must be reasonable given the child’s age and work skills.
2. if the child is in college, or is entering soon, having too much earned income may impact adversely the student’s need-based financial aid eligibility.
Consider purchasing business assets prior to year-end. You can expense up to $25,000 of equipment purchases each year. The remaining assets purchased will be subject to the normal depreciation rules. It is possible that Congress will increase this limit for 2014 and in the future.
Managing Your Adjusted Gross Income (AGI)
Many tax deductions and credits are subject to AGI-based phase-out, which means only taxpayers with AGI below certain levels benefit.
Example of deductions and credits subject to phase outs include education credits, itemized deductions, exemptions, student loan interest and passive rental losses. Unfortunately, the applicable AGI based limits differ for each of these categories of income and deduction. Please consult with your personal contact at Simon Lever to determine the phase-out limits that may affect you.
Managing your AGI can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for joint returns; $200,000 for unmarried taxpayers.
Managing your AGI can be somewhat difficult, since it is not affected by many deductions you can control such as deductions for charitable contributions and real estate and state income taxes. However, you can effectively reduce your AGI by increasing “above-the-line” deductions, such as those for IRA or self-employed retirement plan contributions. If you are selling property, consider an installment sale that shifts part of the gain to later years when the installment payments are received or use a like-kind exchange that defers the gain until the exchanged property is sold. If you own a cash-basis business, delay billings so payments aren’t received until 2015 or accelerate paying of certain expenses, such as office supplies and repairs and maintenance, to 2014. Of course, before deferring income, you must assess the risk of doing so.
You might want to consider these charitable giving strategies that can help boost your 2014 charitable contributions deduction. First, donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year-end enables you to increase your 2014 charitable donations deduction even if you’re temporarily short on cash.
Also consider giving to a donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations. With these arrangements, which are available through many major mutual fund companies, as well as universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice. The minimum for establishing a donor advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. These funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.
Consider a direct gift of appreciated stock to your favorite charity. This strategy fulfills your charitable intentions and helps avoid capital gains taxes on the appreciation in value.
Year-end Investment Moves
Harvest Capital Losses
There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing 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 separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers – your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date.
Zero percent tax rate on capital gains and qualified dividends. If you have taxable income below $73,800 on a joint return or $36,900 on a single return, there is no federal tax on long-term capital gains and qualified dividends. Incomes over these limits may be eligible for partial tax free status.
Year-end Moves for Seniors Age 70 1/2 Plus
Take Your Required Retirement Distributions
The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age beginning with the year they reach age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. If you turned age 70 ½ in 2014, you can delay your 2014 required distribution to 2015 if you choose. But, waiting until 2015 will result in two distributions in 2015 – the amount required for 2014 plus the amount required for 2015. While deferring income is normally a sound tax strategy, here it results in bunching income into 2015. Thus, think twice before delaying your 2014 distributions to 2015 – bunching income into 2015 might throw you into a higher tax bracket or bring you above the modified AGI level that will trigger the 3.7% net investment income tax.
It May Pay to Wait until the End of the Year to Take Your Distributions
If you plan on making additional charitable contributions this year and you have not yet received your 2014 required distribution from your IRA, you might want to wait until the very end of the year to do both. It is possible that Congress will bring back the popular Qualified Charitable Distributions (QCDs) that expired at the end of 2013. If so, IRA owners and beneficiaries who have reached age 70 ½ will be able to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. QCDs equates to an immediate 100% federal income tax deduction without having to itemize your deductions or worry about restrictions that can reduce or delay itemized charitable write-offs. However, to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Once you receive the cash, the distribution is not a QCD and won’t qualify for this tax break.
Ideas for the Office
Take Advantage of Flexible Spending Accounts (FSAs)
If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2015 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts – you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.
If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early.
Don’t Overlook Estate Planning
For 2014, the unified federal gift and estate tax exemption is a historically generous $5.34 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 for reasons that have nothing to do with taxes.
We trust this letter has given you just a few ideas regarding your tax strategies for 2014. Please do not hesitate to contact us for further details or to discuss tax planning opportunities. We will keep you informed of the consequences of any tax legislation that is passed between now and the end of the year. Please visit our website at www.simonlever.com for these updates and for relevant 2015 tax information such as the social security wage limit, maximum retirement plan contribution limits, etc. Thank you for the opportunity to serve you.