Monday, November 3, 2014

The days draw shorter & so does the time for tax planning.

The clock ticks steadily away and it is time once again to consider year-end tax planning.  This is the first in a series of three articles in which we will discuss tax-planning ideas and issues for both individuals and businesses.

Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013.
Some of these tax breaks may be retroactively reinstated and extended, but Congress likely will not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).

This no doubt will delay the start of the tax filing season, perhaps even significantly, so plan accordingly, especially if you are someone who expects to receive a nice refund and have already made early plans about what you intend to do with it!

The expired breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.

Higher-income-earners have unique concerns to address when mapping out year-end plans.

They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an un-indexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year.
Some taxpayers should consider ways to minimize (such as through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than net investment income.  Still other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax could also require year-end actions.

Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax.

There could be situations where an employee needs to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's income won't be high enough to actually cause the tax to be owed.

Wednesday, October 22, 2014

Don't Get Sent to the 529 Penalty Box

The rules regarding what happens if you withdraw 529 assets for outlays other than qualified college expenses, such as tuition, fees, and room and board, don't get a lot of attention. Most investors who put money in 529s worry about being unable to save enough for college, not about saving more than they'll need. But for parents unsure whether their child will attend college--perhaps because of poor academic performance or special-needs challenges--the question of whether to put money into a dedicated college-savings vehicle, such as a 529, is very real.

The first thing to consider if you're unsure the beneficiary will attend college is whether the assets could be transferred to another family member. 529 assets may be transferred from the account of one family member to the account of another without penalty, and the list of potential exchange partners is rather broad. Not only can assets be transferred within the immediate family--from one sibling to another, for example--but families with unneeded 529 assets may transfer them to other relatives, such as cousins, aunts, uncles, and even in-laws.

However, not all families will want to or be able to take advantage of this provision. For example, not everyone wants to hand over the hard-earned money they've saved in a 529 account to an extended family member just to avoid paying taxes. And in some cases, families simply do not have any other relatives who can use the money for college. In cases like these, knowing the rules regarding withdrawals for unqualified expenses--which is accounting talk for taking money out of the account and not using it for anything college-related--is essential. 

Expect to Pay a Federal Tax Penalty
Let's start by looking at the main reason investors use 529 plans to save for college in the first place: the tax advantages. Contributions to a 529 are not deductible on federal income taxes. But earnings on that money grow tax-free, and there's no tax on distributions as long as they're used for eligible college expenses. Plus, many states offer income tax deductions on contributions made to in-state 529 plans.

So what happens if the money is not needed or must be withdrawn early for some reason? In that case the earnings portion of the account is subject to federal income tax plus a 10% penalty as well as any applicable state and local income taxes. Withdrawals of the contributions are not subject to federal income tax because the contributions were made with aftertax dollars in the first place (in other words, no federal tax deduction was given on the contributions). For example, if you contributed $5,000 to a 529 plan--and over time it grew to $7,000--but then you had to use the money for nonqualified expenses, you would owe federal income tax on the $2,000 plus a 10% penalty on top of that amount. The 10% penalty is waived, however, if the beneficiary dies or becomes disabled, or if he receives a scholarship. (Most scholarships don't cover all college expenses, however, so there may well be other opportunities to use funds left in the account). The taxes are to be paid by whomever gets the distribution, which could be the account holder or, in some cases, the beneficiary.

Plans make distributions on a pro rata basis, which means that you can't simply request they pay you back your contributions and leave the earnings in the account as a way to avoid paying taxes and a penalty. (By contrast, you can withdraw your contributions from a Roth IRA at any time without taxes or penalty, while leaving the investment earnings alone.) Rather, if the account consists of two thirds contributions and one third earnings, two thirds of the distribution is taken from contributions and one third from earnings. Some plans do, however, allow account holders to take distributions from a specific investment option within the account, according to a spokeswoman from the College Savings Plans Network, a nonprofit organization that provides information on state-sponsored 529 plans. For example, an account holder who splits 529 assets for one beneficiary into two different investment options within the plan could request a distribution from just one of those options and pay taxes accordingly.

State Tax Break Could Be Jeopardized
The other important tax wrinkle to keep in mind if taking nonqualified 529 distributions involves any state income tax deductions you may have received for contributing to the plan. Many states offer residents such tax breaks for contributions made to an in-state plan, but they may also apply a clawback provision to recapture those unpaid taxes if the contributions aren't used as intended. That means for a nonqualified 529 distribution, you could be required to pay state income taxes on the contribution portion and not just on earnings.  

Whether to fund a 529 account for a beneficiary who may not go to college is a very personal decision, and not necessarily one with a clear-cut answer. On the one hand, you'd hate to pay even more in taxes than you would by saving in a taxable account; this is because of the 10% penalty on 529 earnings for nonqualified distributions, not to mention the fact that those earnings would be taxed as ordinary income rather than at lower long-term capital gains rates. On the other hand, the federal and state tax breaks that could be worth thousands of dollars if the beneficiary does go to college are hard to ignore. Ultimately, only you can decide which risk is the one worth taking.

Tuesday, October 21, 2014

Beware of late year tax changes

Planning for changes in the tax laws — even when no one is sure what they will be as Congress drags its feet ahead of November’s midterm elections — is the most important piece of advice local accountants and tax professionals recommend for small-business owners.
“Small-business owners need to be aware that tax planning is by far the most essential fact this year,said Rice, who specializes in tax deal structuring planning and consulting, business advisory services, tax preparation, tax review and representation before the Internal Revenue Service. “The reason being is many tax provisions have expired and/or not being reenacted. They need to stay in tune with what is going to happen closer to the end of the fourth quarter. After the election, Congress may extend some of those provisions. I’d say the biggest thing is start tax planning and staying up on what is going on in (Washington) D.C.”
One tax law that could change drastically after the election would be the revival of the Section 179 bonus depreciation for 2014. Before 2013, small-business owners and others using the deduction could take a maximum deduction of $500,000 for qualifying business purchases, such as computers, printers and office furniture, among others. Now, the maximum deduction is only $25,000.
In the past, small-business owners would make those large purchases at the end of the year, But all three accountants said that might decision might be unwise this year.
“With business deductions, it’s hard to say,” said Rice, who specializes in tax return preparation and consulting services for businesses, individuals, and not-for-profit entities. “A lot of the tax credits and deductions expired at the end of 2013, and as of yet, have not been extended, modified or really anything done for 2014. I don’t anticipate seeing anything until after the elections. Bonus depreciation has also expired, which allowed a 50 percent deduction for all brand new assets purchased during the year.
“Typically, the case is we don’t hear about it until after it passes until Dec. 31 at midnight. There are a few bills floating around the House to extend the tax provisions, but right now, it’s the roll of the dice. We are not changing the White House this year, but who knows what might happen in the Senate or House.”
Despite the political uncertainty of an election year, creating or contributing to an existing retirement is always sage advice, whether business owners are looking for tax deductions or just ensuring they’ll be comfortable when it comes time to retire.
“The No. 1 thing I recommend to clients is to create or contribute to an existing retirement plan,” said Rice, who specializes in business and management consulting; corporate partnership and individual tax return preparation and planning; estate, retirement and business succession planning; and estate and trust tax return preparation.
“It depends on whether you are self-employed or incorporated. In general terms, a simple IRA could be created by the small business on behalf of employees or themselves, and employees can contribute up to $12,000 per year into the plan,” he said. “On the employer side, you can add up to a 3 percent match. If over 50, employees or owners can add an additional $2,500 to the plan.
“A 401(k) is a little more complicated. It is costly to implement and it requires an annual return where the simple does not. With a 401(k), employees can defer up to $17,500 with an additional $5,500 if over 50. On the employer side, you can match up to 3 percent.”
Tax planning will also help small businesses be prepared for unnecessary penalties and be ready in case the business ends up owing a lot of money to the IRS. This way, the small-business owners can start paying down their debt and not be surprised with a big payment due on April 15.
“One of my big pointers is to encourage business owners to meet with their accountants and discuss their options,” Rice said. “One of the biggest benefits of doing that is to figure out what I can do before the year ends to cut down on my tax bill. It also gives you an idea of what your tax bill will look like. If I’m going to owe $10,000, I don’t want it to be a surprise, plus I have six months or longer to pay it.”
Small-business owners also need to plan for marginal tax rates — the percentage taken from your next dollar of taxable income above a predefined income threshold — and managing their alternative minimum tax — a tax imposed by the federal government on individuals, corporations, estates and trusts.
Taylor said it is especially important to plan for marginal tax rates as those flow through to individual tax returns. He also recommended speaking with a tax adviser to help with planning for the alternative minimum tax.
“A lot of that phases out at $200,000 to $250,000 income with higher rates kicking in at $400,000,” he said. “If small-business owners are not managing this, they won’t know when to pay. A lot of people are trying to figure out when they need to pick up income and manage expenses because they are paying higher tax rates.”
▶ Rice recommends having a good bookkeeping system and making sure records are in order, with receipts to back up disbursements to vendors. This will help make life easier in case of an IRS audit. He also encouraged cash businesses to pay all vendors before the end of the year to get all deductions.
▶ Rice said small-business owners also might consider donating noncash items, such as office equipment, to local nonprofit agencies such as Goodwill or The Salvation Army. He encourages business owners to get receipts for all donations. If an item is valued at $5,000 or more, it must be appraised.

Monday, October 20, 2014

10 Year-End Tax Tips

Here are 10 of the most important 2014 tax planning considerations for individuals, executives and business owners:

1. Accelerate deductions and defer income. Deferring tax is a cornerstone of tax planning. Generally, this means accelerating deductions into the current year and deferring income into next year. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self- employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

2. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non- urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving up a procedure into this year or postponing it until next year, when you'll have more medical expenses. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

3. Make up a tax shortfall with increased withholding. Don't forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you're in danger of an underpayment penalty, try to make up the shortfall through increased withholding on your salary or bonuses. A bigger estimated tax payment can still leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

4. Leverage retirement account tax savings. It's not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement account (IRA) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don't pay taxes until you take the money out at retirement. The 2014 contribution limits are $17,500 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).

5. Reconsider a Roth IRA rollover. It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

6. Leverage state and local sales tax deduction. If you itemize deductions, you can elect to deduct state and local sales tax instead of state income taxes. This is valuable if you live in a state without an income tax, but can also provide a bigger deduction in other states if you made big purchases subject to sales tax (like a car, boat, home or all three). The Internal Revenue Service (IRS) has a table allowing you to claim a standard sales tax deduction so you don't have to save all your receipts during the year. This table is based on your income, family size and the local sales tax rate, and you can add the tax from large purchases on top of the standard amount. If you've already paid enough sales tax that you'll make this election for 2014, consider making any planned large purchases before the end of the year. If you wait to make the purchase in 2015 and won't be electing to deduct sales tax that year, you won't get any tax benefit.

7. Don't squander your gift tax exclusion. You can give up to $14,000 to as many people as you wish in 2014, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don't let it go to waste. If you combine gifts with a spouse, you can give up to $28,000 per beneficiary, per year. For example, a couple with three grown children who are married could give each couple $56,000 each and remove a total of $168,000 gift tax free in a single year. Even more could be given tax free if grandchildren are included.

8. Understand the new home office deduction safe harbor. You can deduct some of the cost of your home if you use your home as your principal place of business, use it to meet clients and customers in the normal course of business, or your office is a separate structure not attached to your home. The amount of this deduction has long been a source of controversy, but the IRS has a new safe harbor this year that allows you to deduct up to $5 per square foot of home office space up to $1,500 per year.

9. Maximize "above-the-line" deductions. Above-the-line deductions are valuable because you deduct them before you calculate your AGI. They are allowed in full and make it less likely that your other tax benefits will be limited. Common above-the-line deductions include traditional IRA and health savings account (HSA) contributions, moving expenses, self-employed health insurance costs and alimony payments.

10. Perform an overall financial checkup. The end of the year is always a good time to assess your current financial situation and plan for the future. You should think about cash flow, health care, retirement, investment and estate planning. Check wills, powers of attorney and health care proxies for changes that may have occurred during the year. Use the open enrollment period to reconsider employer-sponsored programs that could reduce next year's taxable income. HSAs and flexible spending accounts for dependent care or medical expenses allow you to use pre-tax dollars.

Sunday, October 19, 2014

10 Year-End Tax Moves to Make Now

April 15 is the target date for taxes, but to ensure that you pay the Internal Revenue Service the least possible amount on that date, you need to make some tax moves before the tax year ends.

Congress is not making that easy. Once again, U.S. representatives and senators have delayed action on tax extenders, more than 50 business and individual tax breaks that expired on Dec. 31, 2013. Lawmakers are expected to consider, or extend (hence the laws' collective name) after the Nov. 4 election.

The bad news is that there is no guarantee that all the extenders -- including popular things such as the higher education tuition and fees deduction, and itemized claims for state and local sales taxes and private mortgage insurance payments -- will be renewed.

The good news is that there still are some tax breaks on the books that you can use to your advantage before the end of 2014.

Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.

Following are 10 year-end tax moves to make before New Year's Day.

1. Defer your income
The top tax rate is 39.6 percent on taxable income of more than $406,750 for single taxpayers; $457,600 for married couples filing joint returns ($228,800 if filing separately); and $432,200 for head-of-household taxpayers. If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.

Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you're self-employed, don't send out invoices for year-end jobs until early 2015.

This strategy works even if you're not in the top tax bracket, but just about to cross into the next higher one.

2. Add to your 401(k)
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you'll have a bit less income that the Internal Revenue Service can touch. (Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth.) Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.

Few of us will reach the maximum $17,500 that employees can stash in a 401(k), but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $5,500.

In most cases, you can modify your 401(k) contributions at any time, but double-check with your benefits office to be sure of your plan's rules.

3. Review your FSA amounts
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you don't waste it. You can contribute up to $2,500 to an FSA via paycheck withdrawals. If that limit seems lower, you're right. As part of the Affordable Care Act the maximum contribution amount was set at $2,500; before the health care law change there was no statutory limit.

As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. And though the U.S. Treasury recently announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to take steps to adopt it.

Be sure to check with your employer, and if you must use your FSA money by Dec. 31, make sure you do.

4. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.

Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax. This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.

If you do face the 3.8 percent surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.

5. Make the most of your home
 Homeownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year's tax bill. Make your January mortgage payment by Dec. 31 and deduct the mortgage interest on your coming tax return. The same is true for early property tax payments.

6. Bunch your deductible expenses
 Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.

Medical and dental expenses, for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses, which include business expense claims, must be more than 2 percent of AGI.

To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process, the better. It's much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.

7. Add to or open an IRA
 Remember that added money you put in your 401(k) to lower your taxable income? Bulk up your retirement planning even more by contributing to an individual retirement account.

If you have an IRA account or open a traditional IRA, you might be able to deduct at least some of your contributions on your tax return. If you don't make a lot of money, your contribution also could be used to claim the retirement savings contributions credit.

Even if you won't get a deduction, you'll be adding to your nest egg so that you can retire on your terms. And while it's true you can wait until the April 15 filing deadline to contribute for the previous tax year, the sooner you put money into an IRA, traditional or Roth, the sooner it can start earning more for your golden years.

Self-employed workers also get an added retirement saving benefit. There are a variety of plans -- SEP-IRAs, Keoghs, solo 401(k) plans -- into which you can put some of your self-employment earnings. If you're a sole proprietor, your contribution to a self-employed retirement plan also is deductible on your tax return.

8. Be generous to charities
 As you're putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.

Many groups will accept vehicles, with some even making arrangements to pick up the jalopies.

Donate stock or mutual funds that you've held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset's value at the time of gifting. Even better, you don't have to worry about capital gains taxes on the appreciation of your gift.

9. Pay college costs early
 The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return.

The American Opportunity credit replaced the Hope tax credit in 2009 and is in effect through the 2017 tax year. It's worth up to $2,500 with up to 40 percent of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes.

Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.

10. Adjust your withholding
Did you write the U.S. Treasury a big check in April? Or did you get a large refund from Uncle Sam instead? Neither is a particularly good financial or tax plan.

Most of us cover our eventual tax bills through payroll withholding. Ideally, you want the amount coming out of your paychecks throughout the year to be as close as possible to your final tax bill. If you have too much withheld, you'll get a refund; too little withheld will mean you'll owe taxes when you file.

You can correct the imbalance by adjusting your payroll withholding now. The correct amount taken out of your final 2014 paychecks will help ensure that you don't over- or underpay the tax collector too much next filing season.

Friday, October 17, 2014

How to Max Out On Itemized Income Tax Deductions in 2014

In the usual case, the tried-and-true tax strategy at the end of the year is to pull deductions into the current year and push income into the following year. And, for the most part, it still makes sense. But now there’s a few extra tax wrinkles to contend with.

Case in point: Itemized deductions claimed by high-income taxpayers may be reduced by the so-called “Pease rule.” This special tax law provision, which was gradually phased out prior to 2010, was revived in 2013 and will continue to be a thorn in the side of some clients.

Let’s start with this basic premise. Normally, you can use the full amount of your itemized deductions to offset the taxable income on your tax return, thereby lowering your overall tax liability. However, under the Pease rule (named after the Ohio Congressman who sponsored the legislative provision on its initial go-round), certain itemized deductions are reduced by 3% of the amount above an annual threshold. For 2014, the threshold is $254,200 of AGI for single filers and $305,050 for joint filers.

Suppose a joint filer in 2014 has an excess AGI of $200,000 with $50,000 of itemized deductions that are covered by the Pease rule. The couple’s itemized deductions are thus reduced by $6,000 (3% of the $200,000 excess AGI), so they can deduct only $44,000, instead of $50,000. Note that the 80% limit comes into play for only the wealthiest of taxpayers.

Generally, the Pease rule applies to those itemized deductions not affected by some other built-in tax return limit or floor, including several big-ticket items like deductions for charitable contributions, state and local tax deductions and mortgage interest. Conversely, the limit doesn’t apply to medical and dental expenses, investment interest expenses and casualty and theft losses. Key exception: Although a 2%-of-AGI floor applies to miscellaneous expenses, this deduction is still covered by the Pease rule.

The Pease rule may force taxpayers to rethink their tax planning strategies at the end of the year. For instance, say that a taxpayer is contemplating a large gift of property to charity. If the deduction will be reduced by the Pease rule, the taxpayer might postpone the gift until 2015, especially if it appears that he or she won’t be affected by the Pease rule next year.

Similarly, an increase in AGI at the end of the year may have an adverse tax impact on itemized deductions. If a taxpayer has already made substantial charitable gifts in 2014, he or she might seek to postpone taxable income items to keep AGI at a manageable level. One possibility is to defer year-end bonuses to 2015 if the taxpayer is able to time such payouts.

Bottom line: Every situation is different. When upper-income clients are in danger of triggering the Pease rule, schedule a meeting to determine the optimal approach for maximizing deductions.

Wednesday, October 15, 2014

Fall brings 4th quarter and a chance for tax planning

As we're enjoying the fall colors, we're also heading into the last financial quarter of the year. There's plenty of time to look at where you are financially and make some changes before the new year.

- Assess your tax situation. Whether you're self-employed or you get a W-2, you don't have to be surprised each year when you file your tax return about to learn whether you owe, get a refund or broke even on taxes. Contact your tax preparer and ask for a tax planning appointment. You'll need to bring the documents the preparer asks for, and you can adjust your tax withholding or quarterly estimates accordingly. Remember, no one likes to pay lots of taxes in April, but a big tax refund is just an interest-free investment you made with the IRS, so don't see it as a great idea for you.

- Be sure you've contributed to your favorite charities. Nonprofits are accustomed to getting a surge in contributions toward the end of the year. Many people use the last few months of the year to contribute because it allows them to assess their ability to give. If the charities you prefer help those in need around the holidays, the sooner they get your cash contributions, the better they can assess their ability to help at that time. So feel free to get out your checkbook now.

- Clean up your wardrobe. What does that have to do with finance? If you give the clothes you don't wear to a nonprofit's thrift shop, you can get a tax receipt, which will give you a little extra money and allow you to update your wardrobe. Be realistic. If you haven't worn something for a year, give it away. Once you've gone through your closet, turn all the clothes so the hangers face the wrong way, with the open part of the hook out. If you get to the fall of next year and those hangers are still facing the wrong way, you haven't worn that outfit in a year and can put it directly into your thrift store pile.

- Maximize your retirement plan contributions. There are some retirement contributions - IRAs, Roth IRAs, SEPs and some others if you're self-employed - that you can make for this year after Dec. 31 and before you file your taxes for this year. But if you work for a company with some of the more popular plans - 401ks, 403bs, 457s - you can only contribute to the plan through paycheck withholdings and must do it for this year before Dec. 31. So take this opportunity to contribute as much as you can. If your employer matches some of your contributions, make sure you put in that much.

You can reassess your finances any time of year, and now is always a good time.