Dear Clients and Friends,
Perhaps the one issue on which there is agreement in Washington is the need for comprehensive tax reform. However, getting started on this task is put off year after year.
Instead of tackling tax reform in 2014, Congress has once again run out of time and will be lucky if any tax legislation is passed by the end of the year. However, it will be important for you to stay aware of any tax revision that does occur during the coming weeks and months; some could have an effect on your 2014 taxes.
Legislation signed in January 2013 made many provisions in the tax code permanent. While that doesn’t mean the tax code is never going to change again, it does bring some temporary stability to the tax law. However, nothing was done to simplify the tax code. Added to the already complicated rules that taxpayers must deal with are the provisions in the Affordable Care Act which start to significantly affect taxes this year.
This Letter is being sent to urge you to set aside time to do some year-end tax planning. Now is the ideal time to review your 2014 tax picture and to consider actions you can take before year-end to minimize your taxes. Please call if you have questions or if you would like to get together to discuss your tax-cutting options. And please feel free to share this Letter with friends or associates who might be interested in this information.
Do year-end planning to cut your 2014 taxes
The end of another year is fast approaching, and it’s once again time to take steps to reduce taxes on your personal and business returns.
Planning advice for 2014 includes strategies for accelerating deductions and deferring income as well as managing assets.
Bunch your deductions
For example, bunching deductions on your personal income tax return can make sense for 2014. Bunching means you concentrate itemized deductions into the year offering the most tax
benefit and claim the standard deduction in alternate years. Even if the current limitation on itemized deductions applies to you, bunching can be effective when combined with other tax planning such as reducing adjusted gross income.
One category of itemized deductions that lends itself to bunching is charitable contributions. In general, as long as you have written acknowledgment from a qualified charity, you can
deduct donations in the year you write the check or put the charge on your credit card. Instead of cash, donating appreciated assets before December 31 may be more tax advantageous. When you contribute property you have owned for more than a year, you can usually deduct the full fair market value. For instance, say the value of the shares you own in a mutual fund has gone up since you bought into the fund. If you sell those shares and donate the proceeds to charity, you’ll have capital gain. But when you donate the shares to the charity, you can claim a deduction for the value on the date of your donation, garnering a benefit without the related income tax bill.
Other itemized deductions you can control in order to maximize tax savings include real estate taxes and state income taxes.
Check exposure to the AMT
Just remember to check your exposure to the alternative minimum tax and the 3.8% net investment income tax when deciding in which year to pay these tax bills. Why? Certain itemized deductions such as taxes are disallowed under the AMT rules, but can help reduce exposure to the net investment income tax.
What if you’re not planning to itemize? Taking a look at your deductions is still a useful exercise. One reason: The standard deduction is also disallowed under AMT rules, and you may
benefit by itemizing even when your total itemized deductions are under the threshold. The standard deduction for 2014 is $12,400 when you’re married filing jointly and $6,200 when you’re single.
Monitor adjusted gross income
Another tax planning strategy is to reduce adjusted gross income (AGI). One way to do this on your personal tax return is to maximize above-the-line deductions. These are expenses you can
claim even if you don’t itemize. Above-the-line tax savers include such items as retirement plan contributions, student loan interest deduction, and the health savings account deduction.
Set up a retirement plan
When you have a business, contributions to a self-employed retirement plan also reduce AGI above-the-line. Depending on the plan you choose, you can set up the paperwork before year-
end and make contributions by the due date of your 2014 tax return. For instance, say you’re the sole owner of your business. Establishing a 401(k) gives you the opportunity to set aside as much as $17,500 in salary deferral (plus an extra $5,500 if you’re over age 50). In addition, you can put up to 20% of your business profit into your plan.
Manage asset policies
Another tax-saving suggestion for your business is to review your asset management policies. Depreciation is probably the first thing you think of when you consider tax benefits for business
assets. And you probably already know bonus depreciation expired at the end of 2013 and the Section 179 expensing deduction was reduced to $25,000 for 2014. (Be aware that Congress
may reinstate the larger deductions.) While accelerated depreciation tax rules affect your current year deduction, remember that changes to these rules have no impact on the total amount you can deduct over the life of an asset. In addition, you still have tax planning opportunities. One such opportunity is to take advantage of the new repair and capitalization regulations. These rules, which generally take effect this year, provide safe-harbor thresholds for writing off the cost of certain business supplies, repairs, and maintenance. What you need to do before year-end: Create and implement a written policy to comply with the rules.
Another potential tax saver involving business assets: Examine the tax benefits of leasing business equipment instead of buying. Depending on the type of lease, you may be able to deduct payments in full as you make them. What’s the downside? Generally you’ll forfeit depreciation deductions. Run an analysis to determine which option will work best for you.
Consider shifting income
A planning strategy to help reduce taxes on both your business and personal returns is shifting income among family members. For your business, the strategy could mean hiring family members and paying a reasonable and deductible salary for work actually performed. You may be able to provide tax-deductible fringe benefits as well as save on payroll tax expense. An income-shifting technique is to make gifts of income-producing property to family members in lower tax brackets. (Be aware of the “kiddie tax.”) Though you can’t take a tax deduction for gifts, future income is taxed to the recipient, and may mitigate your exposure to the 3.8% net investment income tax. Gifts of up to $14,000 per person ($28,000 when you’re married) made before year-end incur
no income, gift, estate, or generation-skipping taxes. These are just a few of the tax planning opportunities available for 2014. To discuss the tax cutting options suited to your individual circumstances, call us to schedule a year-end tax review.
TheAffordable Care Act: How will it affect your 2014 taxes?
Staggered start dates. Exceptions. Waivers. Are you still trying to determine how the health care laws will affect your 2014 personal and business federal income tax returns?
Here’s an overview of some current rules.
The 2014 Form 1040 has a new line for reporting the “individual responsibility payment.” You’ll owe this penalty if you or your dependents did not have health insurance during the year and don’t qualify for an exemption. The amount you’ll report on your 2014 tax return is the greater of $95 per adult and $47.50 per child, up to a maximum family penalty of $285, or 1% of your “household income formula.”
Individual premium credit.
Depending on your income, you may be eligible for a reduction in the cost of your health insurance premium during the year. When you signed up for insurance on the health insurance exchange, you had the option to use the reduction to offset your premiums as you paid them. Alternatively, you can apply for the credit when you file your 2014 federal income tax return. The amount of the credit depends on your income and family size.
Net investment income surtax.
You may be familiar with this 3.8% surtax from last year’s return. It applies to net investment income – income such as dividends, interest, and capital gains, less related expenses when your adjusted gross income (AGI) exceeds certain levels.
Those levels have not increased for 2014. When you are married filing jointly, the surtax applies if your AGI exceeds $250,000. When you’re single or filing as head of household, the AGI threshold is $200,000.
Medicare surtax on wages.
As in 2013, this 0.9% surtax applies to wages, compensation, and self-employment income when your AGI exceeds $250,000 and you’re married filing jointly. When you’re single or filing as head of household, the AGI threshold is $200,000.
Business health insurance premium credit.
Did you pay at least 50% of the health insurance premium costs for your employees during 2014? If you employed fewer than 25 full-time equivalent employees and paid them wages of less than $50,800, you may be able to claim a credit of up to 50% of the premiums you paid. The credit is available even if you claimed it in prior years. Tax-exempt organizations can also benefit.
When you self-insure your business health care expenses, you may have to pay a fee to help fund a healthcare research institute. The fee may also apply to your health reimbursement arrangement or health flexible spending arrangement.
Depending on the number of workers you employ, you may be penalized for not providing health insurance and/or not providing affordable health insurance. Neither penalty applies for tax year 2014. However, you’ll want to review your workforce to determine whether the penalty will affect you in the future. Beginning January 1, 2015, the penalty will apply when 100 or more full-time employees work in your business. The penalty applies in 2016 when your business employs 50 or more full-time workers. When you employ fewer than 50 workers, you’re not subject to the penalty.
The health care laws included a requirement for reporting on Forms W-2 the cost of the health insurance coverage you provide to your employees. However, reporting is optional for 2014 when you file fewer than 250 Forms W-2. Eight more ways to cut your taxes If you’re looking for ways to cut your 2014 tax bill, you might check out the following suggestions to see if any fit your individual situation. But hurry; there’s not a lot of time left in 2014 to make a difference in the taxes you’ll pay this year.
Consider a health savings account (HSA).
Investing in an HSA gives you a current-year tax deduction while providing a savings account to use to pay out-of-pocket medical expenses currently or in the future. An HSA is not a “use it or lose it” plan. Any funds in the plan at year-end can be used in future years. And be aware that you can fully fund your HSA up to April 15 of the following year.
Beat the “kiddie tax.”
Instead of transferring assets to your children to save for future education expenses, consider contributing to a 529 plan, which can limit exposure to the “kiddie tax” on unearned income.
Use the new “streamlined” home-office rules.
Many self-employed taxpayers declined to claim the home-office deduction because it was so complicated to compute. Now the deduction has been streamlined: It allows those who qualify to deduct $5 per square foot of a home office, up to a maximum of 300 square feet or $1,500.
Use this year’s annual gift tax exclusion.
Finalize any annual gifts you’re making for 2014 by December 31, 2014. There is no gift tax on gifts of up to $14,000 per recipient. Married couples can make joint gifts of up to $28,000 per recipient.
Use your credit card to pay tax-deductible expenses by December 31 if you’re short of cash. You can deduct the expenses on your 2014 return even though you pay your credit card bill in 2015.
Check dependent status.
Keep your college student qualified as your dependent by meeting the “support” test. Generally, your child cannot provide over one-half of his or her own support during the year. Add up funds your child received from work, student loans, and other sources of income. Do you need to increase your level of support before year-end in order to claim the exemption?
If you’re required to take distributions from your retirement plan, do so by December 31 or you face a 50% penalty. If you just turned 70½ this year, you could wait until April 1, 2015, to take a first distribution.
Check your basis in an S corporation.
If you are an S corporation shareholder, your basis in the company will determine whether you can deduct current-year losses or not. Review your basis now to give yourself time if necessary to re-establish basis and avoid surprises at tax-filing time.
Tax Recordkeeping: Tips to make it easier Are you sometimes overwhelmed and intimidated by the prospect of keeping records for federal tax purposes? Well, you are not alone. Here are some suggestions that should help you determine what to keep and for how long.
Normal statute of limitations.
This is three years from the later of the due date or the actual filing date of the return. The statute period can be extended to six years if your income is understated by more than 25%. There is no statute of limitations if fraud is involved.
Keep for seven years.
Be safe and maintain the following records for seven years.
W-2s, 1099s, annual brokerage statements, and other evidence to support taxable income.
Receipts, cancelled checks, invoices, and other evidence to support tax deductions.
IRA and other retirement plan contributions.
Support for all charitable donations of any amount.
Some records contain important information you may need years later. These records should be kept indefinitely.
For example, keep copies of your filed returns. The IRS doesn’t maintain copies after a period of time. Prior returns might be needed to correct an error in your social security wage history.
Also keep information on your real estate holdings. Maintain documents supporting your basis along with improvements. Current tax laws give favorable treatment to your residence, but one Congressional act can change that. It’s better to be prepared.
How to organize.
Three-ring binders are a good collection device. They’re easy to organize and maintain. Computerized records with scanned documents are another alternative. Good tax documentation starts with a commitment to action. If you need more information to organize your tax recordkeeping, give us a call.
This newsletter is issued annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details.
Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For details and guidance in applying the tax rules to your individual circumstances, please contact us.