Year-Finish Tax Planning 2014
Year-finish tax planning is particularly challenging this season because Congress has yet to do something on a number of regulations that expired in the finish of 2013. A few of these regulations might be retroactively reinstated and extended, but Congress might not decide the fate of those regulations before the very finish of the year (and, possibly, not until the coming year). These breaks include, for people: the choice to subtract condition and native sales and employ taxes rather than condition and native earnings taxes the above mentioned-the-line-deduction for qualified greater education expenses tax-free IRA distributions for charitable reasons by individuals age 70-1/2 or older and also the exclusion for up-to-$two million of mortgage debt forgiveness on the principal residence. For companies, regulations that expired in the finish of this past year and could be retroactively reinstated and extended include: 50% bonus newbie depreciation for many new machinery, equipment, and software the $500,000 annual expensing limitation the study tax credit and also the 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Greater-earnings-earners have unique concerns to deal with when mapping out year-finish plans. They ought to be cautious about the three.8% surtax on certain unearned earnings and also the additional .9% Medicare (hospital insurance, or HI) tax that is applicable to people receiving wages regarding employment more than $200,000 ($250,000 for married people filing collectively and $125,000 for married people filing individually). The surtax is 3.8% from the lesser of: (1) internet investment earnings (NII), or (2) the surplus of modified modified gross earnings (MAGI) over an unindexed threshold amount ($250,000 for joint filers or making it through partners, $125,000 for any married individual filing another return, and $200,000 in almost any other situation). As year-finish gets near, a taxpayer’s method of minimizing or getting rid of the three.8% surtax is determined by his believed MAGI and NII for that year. Some taxpayers should think about methods to minimize (e.g., through deferral) additional NII for that balance of the season, others should concept whether they can reduce MAGI apart from NII, along with other people will have to consider methods to minimize both NII and other kinds of MAGI.
The extra Medicare tax may need year-finish actions. Companies must withhold the extra Medicare tax from wages more than $200,000 no matter filing status or any other earnings. Self-employed persons will need to take it into consideration in working believed tax. Also, in figuring out whether or not they might need to make alterations in avoid a problem for underpayment of believed tax, people should also be conscious the additional Medicare tax might be overwithheld. This might occur, for instance, where only 1 of 2 married partners works and reaches the brink for that employer to withhold, however the couple’s earnings will not be sufficient to really make the tax to become owed.
We’ve put together a listing of more actions according to current tax rules that will assist you save tax dollars should you act before year-finish:
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
- Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
- If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA, if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
- It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014 if doing so won’t create an alternative minimum tax (AMT) problem.
- Take an eligible rollover distribution from a qualified retirement plan before the end of 2014 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn’t viable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax.
- Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
- You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015 – the amount required for 2014 plus the amount required for 2015. Think twice before delaying 2014 distributions to 2015 – bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year.
- Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
- If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
- To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
- If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.