Friday, December 19, 2014

Now is the time to meet with your tax adviser

How many times has it been said at “tax time” in the spring “if I just would have known last year, I could have saved some taxes.” Well right now is “last year” for the return you’ll be filing in the spring and a good time to do some year-end tax planning.
When doing tax planning it is important to know which planning maneuvers have a Dec. 31 deadline and which ones can be delayed until April 15.
Contributions for IRAs, Roth IRAs, Health Savings Accounts, Education IRAs and small business retirement plans such as SEP-IRAs and SIMPLE-IRAs can be made up until the filing date of April 15 (SEPs and SIMPLEs can actually be extended when a return extension is filed).
Contributions into 401(k)s, Flexible Savings Accounts and 529 College Savings Plans (to receive state tax benefits) must all be completed by Dec. 31.
In addition, any gifts to charity must be completed by Dec. 31, and here’s a little tax tip I’ve used with some success. After a nearly six-year bull market you may have some appreciated stocks in your portfolio. If you’ve made a pledge to an organization close to your heart explore fulfilling the pledge with a gift of appreciated stock. If you’ve owned the stock for over a year, capital gains tax can be avoided on the stock’s gains and the full amount of the gift is income tax deductible as well, providing a double tax saving. Most organizations can accommodate this process, just call and ask.
Another popular charitable tax break, which allowed taxpayers over the age of 70 1/2 to donate the required minimum distribution from their IRA or retirement plans directly to charity without including the amount in the taxpayer's taxable income expired in 2013. But is on the docket for the lame duck session. If you pay attention and can delay your distribution until later in the month this tip may yet be available in 2014.
Tax transactions regarding investment gains and losses also have a Dec. 31 deadline. While I don’t like making investment decisions based solely on taxes, taxes should of course be considered. If your income falls into the 15 percent tax bracket (single $36,900, joint $73,800) your long-term capital gains tax rate is zero percent for 2014. Conversely, taxpayers with income in the 39.6 percent bracket ($406,751 single, $457,601 joint) will pay 23.8 percent on dividends and capital gains (as opposed to the typical 15 percent rate), so matching potential losses to gains becomes extremely important at higher income levels.
I know tax rules can be complicated, so a great time to actually have a strategy session with your tax adviser is December (trust me, they’re kind of bored right now). So why not sit down with your adviser or do a little research now so April 15 can end up as much in your favor as possible.

Wednesday, December 17, 2014

Year-end tax advice for individuals

Most people do not want to think about taxes during the holidays. However, when we ring in the New Year it will be too late to take advantage of many 2014 tax breaks. It definitely is worth your while to take a little time before Dec. 31 to squeeze in specific tax reduction strategies that will save you money when you file your return in 2015.

Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. For 2014, and looking ahead to 2015, individuals and businesses need to be ready for late tax legislation and prepare for a rash of new requirements and responsibilities under the Patient Protection and Affordable Care Act.

We've outlined some tax planning ideas for individuals that might be applicable to your situation. However, you should consider engaging a financial professional to discuss your specific circumstances in order to minimize your overall tax liability.

Postpone income. Delaying income until 2015 and accelerating deductions this year can lower your 2014 tax bill. By doing so you may be able to claim larger deductions, credits and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI) including: child tax credits, higher education tax credits, and deductions for student loan interest. At the same time, it might be better to accelerate income into 2014. For example, if you plan on purchasing health insurance on a health exchange and you're eligible for a premium assistance credit, then a lower income in 2015 will result in a higher tax credit. It really depends on your situation. If you are subject to alternative minimum tax in 2014, certain deductions, including taxes, are not deductible and therefore should not be accelerated. Reducing your adjusted gross income by postponing income will reduce alternative minimum tax.

Net Investment Income (NII) Tax. The threshold amounts for the NII tax are $250,000 for joint, $125,000 for a married taxpayer filing separately, and $200,000 in any other case. It's important to monitor all of your net investment income to see if you are liable for the NII tax. NII includes more than just capital gains and dividends; it also includes income from a business in which you are a passive participant. Rental income might also be considered NII unless it's earned by a real estate professional. To minimize the potential NII liability, consider strategies that will reduce your income below the thresholds listed above if possible.

Take advantage of zero tax rate on capital gains. The maximum federal income tax rate on long-term capital gains for 2014 is 20 percent. If your taxable income (including the gain) falls within the 10 percent or 15 percent tax brackets, you don't have to pay any tax on the capital gains. You should review your portfolio assets and determine whether you should act before the end of the year.

Realize losses. If you have incurred net capital gains this year, consider selling investments that would generate capital losses prior to December 31. This will allow you to reduce your overall tax bill.

Charitable gifts of appreciated stock. You can boost your charitable contributions by donating stock or mutual fund shares instead of cash. By doing so, you get to deduct the fair market value of your shares and permanently avoid income tax on the capital gain. In turn, the organization or charity you contribute to will receive the full amount. You need to have owned the stock for more than a year in order to deduct the fair market value and you can only deduct up to 30 percent of your adjusted gross income.

Estate and gift taxes. The maximum federal unified estate exclusion amount for 2014, as adjusted for inflation, is $5.34 million for gifts made and estates of decedents dying in 2014. In addition, you can give up to $14,000 in cash or other property completely tax-free to as many individuals as you want - and it doesn't count towards the lifetime exclusion. If you're married, you and your spouse can each gift $14,000 raising the annual maximum exclusion to $28,000.

These are just some of the year-end steps you can take to minimize your overall tax liability. There may be more opportunities if Congress acts quickly to reinstate the tax extenders for individual taxpayers including the state and local sales tax deduction, special mortgage debt forgiveness provisions, higher education tuition deduction, IRA distributions to charities, and teachers' classroom expense deduction. Take the time to meet with your financial advisor so you can act appropriately before Dec. 31.

Tuesday, December 16, 2014

Last Minute Year-End 2014 Tax-Saving Moves for Corporations


As year-end approaches, it would be worthwhile to consider whether you could benefit from the following “last minute” tax-saving moves, including adjustments to income to preserve favorable estimated tax rules for 2015, deferral of certain advance payments to next year, and fine-tuning bonuses 
Accelerating or deferring income can preserve an estimated tax break.Corporations (other than certain “large” corporations) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100 percent of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100 percent of the current year’s tax. However, the safe harbor for 100 percent of last year’s tax isn’t available unless the corporation filed a return for the preceding year that showed a tax liability. A return showing a zero tax liability doesn’t satisfy this requirement. Only a return that shows a positive tax liability for the preceding year makes the safe harbor available.
A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100 percent of its much larger 2015 taxable income. Also, by accelerating income from 2015 to 2014, the income may be taxed at a lower rate in 2014, for example, at 15 percent instead of at 25 percent or 34 percent. However, where a 2014 NOL would result in a carryback that would eliminate tax in an earlier year, the value of the carryback should be compared to the cost of having to pay only a small amount of estimated tax for 2015.
An accrual basis business can take a 2014 deduction for some bonuses not paid until 2015. An accrual basis corporation can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if (1) the employee doesn’t own more than 50 percent in value of the corporation’s stock, (2) the bonus is properly accrued on its books before the end of the current tax year, and (3) the bonus is actually paid within the first two and a half months of the following tax year (for a calendar year taxpayer, within the first two and a half months of 2015).Generally speaking, a taxpayer will be treated as a “large” corporation for estimated tax purposes only if it had taxable income of $1 million or more in any one of the three preceding tax years. As a result, a corporation that didn’t reach that threshold in 2012 or 2013, but expects net income of $1 million or more in 2014 and later tax years, will have an additional incentive for deferring income into (or accelerating deductions from) 2015. If such a shifting of income or deductions lets the corporation avoid reaching the $1 million threshold in 2014, it will be able to use the safe harbor for 100 percent of last year’s tax in 2015.
For employees on the cash basis, the bonus won’t be taxable income until the following year. The 2014 deduction won’t be allowed, however, if the bonus is paid by a personal service corporation to an employee-owner, or by an S corporation to an employee-shareholder, or by a C corporation to a direct or indirect majority owner.
Accrual-basis taxpayers can defer the inclusion of certain advance payments. Accrual-basis taxpayers generally may defer including in gross income advance payments for goods until the tax year in which they are properly accruable for tax purposes if the income inclusion for tax purposes isn’t later than it is under the taxpayer’s accounting method for financial reporting purposes.
An advance payment is also eligible for deferral—but only until the year following its receipt—if:
1. including the payment in income for the year of receipt is a permissible method of accounting for tax purposes;
2. the taxpayer recognizes all or part of it in its financial statement for a later year; and
3. the payment is for (a) services, (b) goods (other than goods for which the deferral method discussed above is used), (c) the use of intellectual property (including by lease or license), (d) the occupancy or use of property ancillary to the provision of services, (e) the sale, lease or license of computer software, (f) guaranty or warranty contracts ancillary to the preceding items, (g) subscriptions in tangible or intangible format, (h) organization membership, and (i) any combination of the preceding items.
For example, let’s say an accrual-basis calendar-year taxpayer received a payment on Nov. 1, 2014 for a contract under which it will repair a customer’s computer equipment for two years. In its financial statements, the taxpayer recognizes 25 percent of the payment in 2014, 50 percent in 2015, and 25 percent in 2016.For tax purposes, under the deferral method discussed above, the taxpayer can report 25 percent in 2014 and defer 75 percent to 2015.
The deferral method cannot be used for (1) rent (unless it’s for items (c), (d), or (e), above), (2) insurance premiums, (3) payments on financial instruments (such as debt instruments, deposits, letters of credit, etc.), (4) payments for certain service warranty contracts, (5) payments for warranty and guaranty contracts where a third party is the primary obligor, (6) payments subject to certain foreign withholding rules, and (7) payments in property to which Section 83 of the tax code applies.
If an advance payment is only partially attributable to an eligible item, it may be allocated among its various parts, and the deferral rule may be used for the eligible part.
Taxpayers wishing to change to the above method may use automatic consent provisions (with certain modifications).Advance consent procedures apply in certain cases, such as where advance payments are allocated.

Sunday, December 14, 2014

Year-End Tax Planning Ideas For Big Savings

With less than a month left in the year, you can easily get a rough idea of how much you will owe in taxes for the 2014 tax year. If your anticipated tax bill is giving you sticker shock, there are a number of investment moves you can take between now and the end of the year to help reduce your tax liability for the 2014 tax year.
  • Boost your 401(k) contributions. If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford. You typically contribute pretax dollars, so the more you invest, the lower your taxable income. Your earnings also grow on a tax-deferred basis. For 2014, you can contribute up to $17,500, or $23,000 if you are 50 or older. (These same limits apply to 403(b) and 457(b) plans.)
  • Contribute to a 529 college savings plan. 529 plan contributions may be tax deductible in your state. When you contribute to a 529 plan, your earnings grow tax-free, provided they are used for qualified higher education expenses. (However, distributions not used for qualified expenses may be subject to income tax and a 10 percent penalty.)
  • Sell your "losers." If you own investments that have lost value, you can sell them before 2014 ends and use the tax loss to offset some capital gains you may have earned in other investments. If you have zero capital gains, you can use up to $3,000 of your tax losses to offset other ordinary income. And for a loss greater than $3,000, you can "carry over" the excess and deduct it from your taxes in future years. If you still like the investment sold at a loss, you must wait 31 days before repurchasing it to avoid violating IRS "wash sale" rules.
  • Delay selling your "winners." Capital gains can increase your adjusted gross income -- and, consequently, your tax bill. So if you are considering selling an asset that has increased in value, such as a stock, you may want to wait until January so the gain will be realized next year.
  • Be generous. Your cash contributions to qualified charities may be tax deductible. But you might get even bigger tax breaks by donating appreciated assets. Suppose, for example, that you purchased shares of ABC stock for $1,000 and they are now worth $10,000. If you were to give these shares to a qualified charity, and you are in the 28 percent tax bracket, you may get a $2,800 tax deduction, based on the current market value of the donated shares.
  • Postpone purchasing mutual fund shares. Many mutual funds pay capital gains distributions in December. So, if you were to buy shares just before the distribution date, you may get a larger distribution, but you will owe capital gains taxes on the money you invested without receiving much benefit from your investment. To avoid this potential problem, ask for the date of the distribution and consider delaying additional investments until afterward.
In addition to these year-end strategies, you may also want to increase your contributions to your traditional or Roth IRA, although you actually have until April 15 to contribute for the 2014 tax year. You can put in up to $5,500, or $6,500 if you are 50 or older. Traditional IRA contributions may reduce your taxable income for 2014, depending upon your income and whether you or your spouse participates in a plan sponsored by your employer. Roth IRAs will not reduce your current taxable income; however, qualifying distributions in the future may be tax-free.
Implementing one or more of these strategies may help you accomplish two objectives -- make progress toward your financial goals while brightening your outlook for the 2014 tax year. That may be a pretty good combination.

Friday, December 12, 2014

Close of 2014 tax planning presents challenges to individuals, 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 may not decide the fate of these breaks until the very end of this year and, possibly, not until next year.

For individuals, these breaks include the following:
-      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 70½ or older; and
-      The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
For businesses, the tax breaks that expired at the end of 2013 and may be retroactively reinstated and extended include the following:
-      A 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 their year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, known as HI) tax that applies to individuals who receive 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 unindexed 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 their estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize additional NII for the balance of the year (e.g., through deferral). Others should try to see if they can reduce MAGI other than net investment income and other individuals will need to consider ways to minimize both NII and other types of MAGI.
The additional Medicare tax may 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 this into account when figuring their estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. An example of where this may be the case is an individual who 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. The taxpayer 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 do not exceed $200,000. Also, to determine whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals 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 will not be high enough to actually cause the tax to be owed.

Thursday, December 11, 2014

Time's Running Out for End-of-Year Retirement Planning

When it comes to saving for your retirement, time can either be your best ally or your worst enemy. If you start early and save consistently, it's quite possible for you to wind up retiring as a multimillionaire. The longer you wait, however, the tougher it is to amass the kind of money you'll need to build a nest egg that'll keep you comfortable through the rest of your life.

Not only do the number of years you have left matter when it comes to saving for your retirement, but the time during the year that you invest for your retirement matters, too. There are key deadlines you have to meet if you want to take advantage of qualified tax-deferred retirement plans like your 401k or an IRA. Meet those deadlines and you may be able to cut your taxes now or in retirement and take advantage of decades of tax-deferred compounding. Miss them, and you miss out on those advantages.

The Clock Keeps Ticking

If you have access to a 401k, 403b or the U.S. government's Thrift Savings Plan, you have until Dec. 31, 2014 (or more likely -- your last paycheck of the year) to contribute to your plan. In 2014, you may be able to contribute as much as $17,500 to your plan if you're under age 50. If you're aged 50 or older, the 2014 limit rises to $23,000 this year thanks to a $5,500 catch-up provision. In 2015, the limits increase to $18,000 if you're under age 50 and $24,000 if you're at least 50.

Regardless of if you have access to such a plan at work, you may be able to contribute to either a traditional or a Roth IRA. The window to contribute to your IRA for 2014 is open until April 15, 2015. If you're under age 50 at the end of 2014, the maximum potential contribution amount is $5,500. If you're age 50 or older, the limit is $6,500. For 2015, the limits will be unchanged.

If you're self-employed, you have a little more time. You have until the deadline for your 2014 taxes -- including extensions -- to establish and fund your SEP IRA. That gives you until Oct. 15, 2015, to set up that plan to shelter up to 25% of your self-employment income, but no more than $52,000 for 2014 (the limit becomes $53,000 in 2015).

Why These Deadlines Matter

Qualified retirement accounts like these are incredibly powerful tools for you in your retirement planning. Money you sock away in the plans grows tax deferred and may offer you either a tax deduction as you contribute or the opportunity to take qualified withdrawals completely tax free. You may also be eligible for a match in your employer-sponsored plan -- but you need to participate to get that match. Additionally, the money you have socked away in qualified plans may be protected from your creditors, too, based on either federal or state laws.

On top of all that, you generally face a 10 percent penalty on top of your ordinary income tax rates if you take money out of your qualified retirement account before age 59 and a half (though there are some exceptions to that penalty). That penalty can be a great deterrent against drawing down the money before you retire, helping improve the chances that the money will actually be there for your retirement.

Still, to take advantage of all those benefits, you have to get your money invested in your plan by its deadline. Otherwise, the window for that particular year slams shut forever. If you miss a deadline, you can always invest in an ordinary brokerage account and call it your retirement account. Just remember, though, that if you miss that deadline you won't get any of the unique tax, creditor and potentially matching benefits that come as part of a qualified retirement plan.

Your Retirement Depends on It

The deadline for your 401k, 403b or Thrift Savings Plan contributions for 2014 will be here sooner than you think, and the other plans' deadlines aren't really all that far behind. In addition, the sooner you get started, the faster you can put your money to work compounding for you. That, more than anything else, is the key financial ingredient that will get you through your retirement comfortably.

So use these looming deadlines as a reason to get started and fund your retirement plans. Your future self will thank you for it.

Tuesday, December 9, 2014

7 Important Income Tax Tips

The end of the year is a time to reflect upon the past and plan for the future, including planning for income and estate taxes. Below, we present some important income and estate tax items to consider before the end of the year.

Contributions to a Retirement Plan

Self- employed individuals can establish and fund a qualified retirement plan. There are many different types of plans including Simplified Employee Pension plans (“SEPs”), Solo 401(k) Plans, Savings Incentive Match Plans for Employees (“Simple Plans”), profit sharing plans, and defined benefit plans. Each plan has its own advantages and disadvantages, and the maximum contribution allowed for each plan varies. Some of these plans need to be established prior to December 31, 2014, although they could be funded in 2015 with the amount contributed treated as a deduction in 2014.

Employees not covered by a retirement plan at work can establish an Individual Retirement Account (IRA), and all individuals should consider establishing a Roth IRA.

Prepaying State Income Taxes

State income taxes are deductible when paid. If you have a state estimated tax payment due January 15, 2015, consider accelerating that payment to sometime prior to December 31, 2014 in order to deduct the payment in 2014. However, keep in mind that state income taxes are not deductible for alternative minimum tax purposes.

In addition, a new wrinkle is the impact that state income taxes have on the net investment income tax. A careful analysis of your 2014 and 2015 tax liability (including your alternative minimum tax and net investment income tax) should be done to determine if it is beneficial to prepay state income taxes.

Evaluating Year-to-Date Capital Losses and Year-End Capital Gains

Capital losses can offset capital gains plus $3,000 of ordinary income. Now is the time to review your investment portfolio and your year to date capital gains and losses to determine if you should realize any more losses and/or gains. If you have an overall net loss so far, consider selling some appreciated positions to lock in the gains. If you have an overall net gain so far, consider selling some loss positions to reduce your potential tax liability. Triggering capital losses could also reduce your net investment income tax. You could buy back the securities sold at a loss provided you purchase the securities either more than 30 days before or 30 days after the sale. Capital losses in excess of capital gains plus $3,000 can be carried over. However, some states do not permit carryovers of capital losses.

Charitable Donations

If you are charitably inclined, a donation to a charitable organization can reduce your tax bill. Checks to charities must be in the mail on or before December 31, 2014, while donations charged to a credit card can be deducted if charged in 2014, even if not paid until 2015. Consider giving appreciated securities to a charity instead of cash. The tax deduction for a contribution of appreciated securities is generally equal to the fair market value of the securities given and you do not have to pay income tax on the appreciation associated with the securities. Contributions of appreciated securities to public charities are limited to 30% of your adjusted gross income as opposed to contributions of cash to public charities which are limited to 50% of your adjusted gross income.

Annual Exclusion Gifts

Everyone is allowed to give $14,000 each year to any number of recipients. Married taxpayers can give up to $28,000. This amount is free of any gift or inheritance tax and the recipient is not subject to income tax on the gift.   The gift can be any type of asset - cash, check, stock, artwork, etc. However, it must be a gift of a “present interest” – meaning that the recipient must be able to access the property now, and not just in the future.

Annual exclusion gifts are a simple yet effective way to potentially significantly reduce one’s estate tax. For example, a married couple with three children and nine grandchildren can annually give away $336,000 ($28,000 to each of their twelve descendants) without paying any gift tax. By following this practice for five years, they would have removed $1,690,000 from their taxable estate.

An annual exclusion gift made around the holidays would likely be much appreciated.

Children or Grandchildren Education Planning

Consider opening and funding a section 529 plan. There are many different plans available, all of which are essentially a savings plan for college.

Earnings in a section 529 savings plan and qualified distributions from it are not taxed. Qualified distributions are distributions used to pay for a person’s qualified higher education expenses at an accredited post-secondary educational institution offering credits towards a degree (associate’s, bachelor’s, or graduate/professional degree) plus certain vocational institutions. Qualified higher education expenses are “tuition, fees, books, supplies and equipment.” Certain room and board expenses are also considered qualified higher education expenses

Contributions to section 529 plans qualify for the annual exclusion described above.   In addition, you are allowed to fund up to five times the annual exclusion ($70,000) in one year and treat the transfer as made over five years. Married taxpayers can fund up to $140,000 in one year and treat the transfer as made over five years.

Review Important Tax Documents

Now is a good time to review all your important tax documents such as last wills and testaments, health care proxies, powers of attorney, and trusts. In addition, you should review beneficiary designations for retirement plans and life insurance policies and check how all your property and bank/brokerage accounts are titled. As you go through this review, consider the following:

Have children been born since your documents were last updated?
Has there been a divorce?
Has there been a marriage?
Are the named trustees still close confidants?

Now is the time to consider all the above items before it is too late. Should you need assistance with your year-end income and estate tax planning speak with your trusted tax advisor.