Tuesday, October 14, 2014

MAKING CENTS: Planning for 2014 taxes

Every year taxpayers look for ways to reduce the burden of federal and state income taxes. Yet most taxpayers do little during the tax year to make that happen.
Just a year or two ago, as most knew that higher rates were coming, the direction was to accelerate income and hold off on deductions to the largest extent possible. With the changes to the tax code now in full force, high income taxpayers are again looking to maximize deductions and deferring income.
Let’s review the changes that high wage earners will see on 2014 returns.
The first change is in the top tax rates. Married taxpayers who file jointly will now pay an income tax rate of 39.6% on earnings above $450,000. That’s 10 percent more in income taxes on your top layer of earnings. For families earning over $250,000, there will be an additional 0.9% Medicare tax on earnings –– a top rate on ordinary income of 40.8% in federal taxes alone.
For families earning over $300,000, your itemized deductions such as mortgage interest and property taxes begin to phase out.
Next is the change in capital gains rates. What was a 15% rate on long term capital gains is now a 20% rate. This 33% increase in capital gains taxes is painful enough, but there’s more. For those families again earning over $250,000, you’ll be assessed with an additional 3.8% rate on your net investment income. Net investment income includes capital gains, interest and dividends minus any expenses such as management fees or administrative fees.
With income tax planning you are somewhat guessing about future rates. Sentiment at this time does not favor a tax cut, so most planners today assume that tax rates will remain constant or go higher in the near term. With that in mind, high earning taxpayers would look to keep their earned income as low as possible by maximizing deferrals such as contributions to retirement or deferred compensation plans.
Accelerating deductions can be a slippery slope, as many of these get phased out as your income climbs. But you may look to some non-traditional deductions or credits such as those available for energy saving improvements to your home, investments in oil and gas, or the contribution of appreciated property to a favorite charity.
As for investment income and the capital gains rates, there may still be time to minimize the tax bite for 2014.
Using a qualified income tax planning professional, prepare a pro-forma of what your tax return may look like if today were the end of the year. Next discuss strategies to minimize capital gains and reduce net investment income from now until the end of the year and re-cast your forecast the possible tax savings.