End of year tax planning tips

Before you start thinking about holiday shopping, give some thought to year-end tax planning and preparation.

It’s not too late to take some efficient tax-savings measures for 2014. With proper tax planning, you can maximize your potential tax savings and minimize your tax liability.

Tax planning means looking at your estimated income, deductions and tax liability. Year-end tax planning lets you examine your current financial status and set goals to help you achieve your financial objectives.

To help you prepare:

Check your earnings and withholdings

Look at your current earned wages or other income and how much has been withheld for income taxes or what quarterly estimated taxes have been paid.

Then try to make a reasonable effort of estimating the earned income and withholdings for the remainder of the year. Add to this income your projection of other income, such as interest dividends or capital gains, for the entire year.

Take last year’s tax return and adjust the numbers for the income and expenses you anticipate this year. Even though it’s not going to be exact, you can get a good idea of where you’ll be.

At this point, you can see if you are likely to owe taxes for 2014 or get a refund.

You may then need to consider adjusting your withholdings. Toward year-end, if you are due a bonus, ask if your employer will defer it until January. This might give you more time in 2015 to do some more effective tax planning.

Life changes

Did you get married or divorced this year? Change jobs or retire?

A change in employment, for example, may bring about severance pay, sign-on bonuses, stock options, moving expenses and COBRA health benefits, among other changes that affect your taxes.

Itemized deductions

Will you itemize your deductions or take the standard deduction for 2014? How do you determine which to use?

The standard deduction is determined annually and is a “no questions asked” allowance as a reduction of your income.

For 2014, the amounts for different filing statuses are:

• single: $6,200
• head of household: $9,100
• married filing jointly: $12,400
• married filing separately: $6,200

Deciding to itemize deductions depends on how much you spent on items such as the ones listed below, which are by no means an exhaustive list:

• medical expenses exceeding 10 percent of your adjusted gross income;
• state income, personal property and real estate taxes;
• interest on home mortgages;
• interest on debt to purchase or carry investments, limited to the amount of your investment income;
• charitable contributions in cash and in kind; and
• certain employee and investment expenses to the extent they exceed 2 percent of your adjusted gross income.

If the total amount spent is more than your standard deduction, it may be beneficial for you to claim the itemized deductions.

If it looks as if you won’t have enough of those to itemize in 2014, you may want to defer as many of those expenses as you can, pay them in 2015 and start the comparison again — in effect, “bunching” your deductions.

The (tax) code has a lot of deductions and exemptions available to people.

Check your investments

If you already have taxable capital gains from, for instance, selling stock or real estate, see if you have some unrealized capital losses in other assets that you can sell before year-end to offset those gains and reduce your tax liability.

You can deduct up to $3,000 in capital losses each year, and if there are more (losses), you can carry them forward.

If you’re thinking of selling stock, consider postponing the gain until January to avoid the tax in 2014.

But first make the right decision from an economic or investment standpoint.

Don’t let the ‘tax’ tail wag the ‘economic’ dog. Make sure the decision benefits your overall financial objectives.

Retirement plans

One of the best tax-planning opportunities is to maximize your retirement contributions. Make elective deferrals to your 401(k) account in addition to what your employer contributes.

You can reduce your income by up to $17,500 — $23,000 if you are at least 50 — in some cases. Money you contribute to your 401(k) plan is excluded from your income, which helps lower your tax bill.

If you work and are not covered by a qualified retirement plan, you can make a deductible Individual Retirement Account contribution in 2015 before April 15, the original due date of the return.

Those contributions are deductible in 2014. You basically have 15 months to contribute to an IRA for the current tax year. For example, you can make 2014 contributions any time from Jan. 1, 2014, to April 15, 2015.

Education savings opportunities

Education savings plans are a good long-term savings vehicle to provide for your children’s or grandchildren’s college expenses.

Income earned in these accounts is not taxed as long as the funds withdrawn go toward qualified education expenses.

Generous giving

For 2014, you can give up to $14,000 to a person without incurring any federal gift-tax liability. If you’re married, you and your spouse can give up to $28,000 per recipient.

However, to qualify for the annual gift exclusion, you must give the funds directly to the individual or put them into a trust with certain requirements. You do not get an income-tax deduction for gifts to relatives.

Health insurance

The federal Affordable Care Act now mandates that you carry health insurance or make a shared responsibility payment, unless you’re exempt.

For many, employer-provided health insurance, Medicare or Medicaid satisfies this mandate.

If you must make a responsibility payment with your 2014 return, you owe a twelfth of the annual payment for each month that you or your dependents are not covered or exempt.

For 2014, the total annual payment is generally the greater of:

• 1 percent of your household income above the tax return threshold for your filing status (for example, your income above $10,150 if you are younger than 65 and file using single status, or your income above $22,700 if you file as married filing jointly with your spouse and you’re both 65 or older);
• or a flat dollar amount of $95 per adult and $47.50 per child, to a maximum of $285.

The annual payment maxes out at the cost of the national average premium for a bronze-level health plan available through the Marketplace in 2014: $2,448 per individual, $12,240 for a family of five or more.

Spend your FSA money

A flexible spending account is a savings account offered by an employer that helps you put away tax-free money for qualified medical expenses.

The IRS has changed the rules so that employers can allow employees to carry over up to $500 in their account to the next year. Companies have the option to allow participants to roll over unused funds, but are not required to do so.

If your FSA is a “use it or lose it” one, you’ll want to make sure to use all of your funds by the end of the year. Spend down your FSA on qualified medical expenses to help maximize your tax savings.

And you want to use your flexible spending account for dependent care.

When you start your 2015 tax planning, evaluate the amount you spent in your FSA during 2014 and adjust accordingly.

And for next year?

Start now keeping really good records.

Don’t miss deductions for sloppy record keeping.

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.