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.

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.

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.

Savvy tax-planning tips for end of the year

As the end of the year approaches, it’s time to think about saving significant money by planning for April. That, of course, is when your tax return for 2014 will be due.

And what you do before the end of 2014 could make a huge difference in whether you end up having more money to spend in 2015 after filing your 2014 tax return. Consider some key credits and deductions to harness now.

• Job search or job move. If you were looking for a new job this year or are moving for a new one, realize that if you itemize on your tax return, you can use job-interview trips, résumé printing costs and moving expenses to reduce your taxes. Moving expenses apply only if you moved at least 50 miles to take a new job. And job-hunting travel expenses apply only if they meet cost thresholds and weren’t covered by the employer.

• Charity begins in your closet, garage or IRA. You can donate clothes, computers, cars, and stock and other investments to IRS-approved charitable organizations and get a deduction. With clothes, list them with fair values and have charities sign the list. In the case of a car, the value depends on whether the charity sells or keeps it.

For people with stocks, mutual funds or other investments that have soared in value, give shares directly to charity and get the full value as a deduction. This is smarter than selling an investment and giving cash instead to charity. Selling usually means you owe Uncle Sam for the capital gain. You avoid paying Uncle Sam for those gains if you give shares directly to the charity, including churches.

• Last-minute income slashing. Many valuable credits like the child-tax credit or the elderly/disabled credit depend on making sure your income isn’t above certain thresholds. If you anticipate being just over the threshold, you might be able to cut income down by year-end. If you have a bonus coming in December, ask that it arrive in January. If you are self-employed, you can bill a client late in December so the payment arrives in January. Wait to sell stocks or bonds that have gained, or sell another investment at a loss to offset the total gain. Unfortunately, seniors over 70½ must take minimum distributions from IRAs even if that adds unwelcome income.

• Go to the doctor.For medical expenses to be deducted, they must total 10 percent of your adjusted gross income, or 7.5 percent if you are over 65. So go to the dentist or doctor now; maybe buy glasses or prescriptions. Go to irs.gov for more information.

• Think 401(k) for easy income cutting.The easiest way to cut income is to stash more money into your 401(k) or tax-deductible IRA, or open a 401(k) or SEP IRA for a small business. Maximum 401(k) contributions are $17,500, or $23,000 if over 50.

• Get help with college costs.If you or your kids are in college or if you take a special course to advance in your job, maximize large credits. Pay enough in tuition and fees this year to get the maximum credit of $2,500 per student under the American Opportunity Credit. If you’ve maximized the credit this year, wait until next year, if you can, to pay college bills so you can get the $2,500 maximum next year. See income cutoffs and rules at irs.gov.

For adults taking extra classes, use the Lifetime Learning Credit to get up to $2,000 on $10,000 in expenses. Still saving for college? You may get a deduction on your state income taxes if you contribute to a 529 college savings plan in your state.

• Your house can help. If you receive a January bill for your mortgage or property tax, consider paying it by the end of December. Major environmental improvements like solar panels can also provide a credit up to $500.

Tax-Saving Tips for Year-End

Instead of wracking your brain over what color sweaters you'll give to your loved ones this holiday, you might want to consider ways in which you can still reduce your 2014 tax bill including:

Prepay deductible expenditures. If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2014 write-offs makes sense if you expect to be in the same or lower tax bracket next year.

State and local taxes. Prepaying state and local income and property taxes that are due early next year can reduce your 2014 federal income tax bill, because your total itemized deductions will be that much higher.

Give to charity. Making donations this year that you would otherwise make next year will push your itemized deductions that much higher this year, trimming your tax bill.

Accelerate deductions and defer income. Deferring tax is a cornerstone of tax planning.
Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of adjusted gross income.

Leverage retirement account tax savings. It’s not too late to increase contributions to a retirement account.

6 tips for managing your year-end tax planning

The end of 2014 is shaping up to be relatively quiet compared to the challenges of recent years - such as the fiscal cliff. After this year’s mid-term elections a lame duck Congress needs to fund the operations of the federal government, so it is possible new tax law changes could affect current income tax and financial planning. For the time being, though, the current laws provide the guidelines of how taxpayers need to plan.  As a taxpayer, you can take steps now to:

1. Avoid withholding too little.

If you think you’re going to owe money when you file your return, consider increasing your tax withholding with your employer or paying 100 percent of what you owed in taxes last year - or 90 percent of what you estimate you owe this year - to the IRS now. In general, you’re not subject to penalties or interest if you make such payments.

2. Minimize taxes from capital gains.

One way to do this is to sell stocks or mutual funds at a loss to offset any capital gain that you have for the year.

If you’re married and your combined income is $73,800 or less - or if you’re single and your income is $36,900 or less - you are eligible for a federal zero percent long-term capital gains rate. If you qualify for this rate, you may want to take advantage and sell some stock in a gain position.

If your income is higher, consider other steps - such as making your January mortgage payment in December - to reduce your income and qualify for the zero percent federal rate on capital gains. Remember that you may still be subject to state income taxes.

3. Stay below the 3.8 percent investment income tax threshold.

The 3.8 percent tax on investment income became effective in 2013, with a threshold of $200,000 of adjusted gross income for individuals and $250,000 for joint filers.

Short term, you can manage your tax position to keep below the income threshold or minimize investment income in any year where you’ll exceed the threshold. Longer term, consider investment options that avoid the tax, such as tax-exempt bonds.

4. Consider converting retirement assets to a Roth IRA.

Even with tax rates remaining the same or rising, converting traditional IRA assets to Roth IRA assets may still be wise. For one thing, having Roth IRA assets diversifies your retirement assets from a tax perspective. Roth assets allow you to better manage your tax position annually in retirement, and limit the impact of Medicare surcharges and the 3.8 percent investment tax.

Remember, if you wait to convert until January 2015, your tax liability will not be due until you file your return in 2016, giving the Roth assets time to grow tax-free.

5. Contribute to an IRA.

You may contribute to an IRA annually as long as your earned income is at least the amount contributed and you’re not yet 70 1/2.

Income limits apply only to determine if the contribution is deductible from income. Don’t be confused into thinking you’re not eligible. To be clear, every individual with earned income and who has not reached age 70 1/2 can contribute to an IRA. But it may be on an after-tax basis. Still, the earnings are tax-deferred. This can be a powerful way to add to retirement savings on a tax-favored basis.

Funding a traditional IRA also offers an indirect path to funding a Roth IRA for those who earn too much and cannot fund the Roth directly. Once you fund a traditional IRA you can immediately convert it to a Roth. There are no income limits that apply to Roth conversions, and assuming this is your only IRA, there should be little or no income tax due upon conversion because there should be little or no gain on the assets.

Regardless of whether you fund a traditional or Roth IRA, consider making your 2014 contribution now rather than waiting for the April 15, 2015 deadline. Also, consider making your 2015 contribution in January. By accelerating the contributions, you will allow more time for these investments to grow on a tax-deferred or tax-free basis.

6. Make charitable contributions using IRA funds.

The special provision to exclude from income certain IRA funds used for charitable contributions expired at the end of 2013. However, Congress may reinstate the provision this year or early next. So you should adhere to the old provision to be eligible for the reinstated version. For example, pay IRA funds directly to the charity and limit the contribution to under $100,000. There’s no guarantee you’ll qualify under a reinstated provision, but not observing the formalities will almost certainly mean you’ll be ineligible.

Of course, because individual circumstances are unique, it’s always a good idea to consult with your tax and legal advisors before making any tax-related decisions.

Take talk of suicide seriously

Originally published:
http://www.jsonline.com/news/opinion/take-talk-of-suicide-seriously-b99154697z1-234153901.html

"Patty is gone" was what I heard when my sister, Maureen, called me on Dec. 3, 2012. My first thought was that Patty had left the care home and was heading back home. No, Patty had taken her life that morning.

I did not have the opportunity to say goodbye. This was something our family and her doctor had given a zero to 5% chance of happening. Suicide had been discussed with Patty, and she had given her "guarantee" that suicide was not an option.

Her wonderful psychiatrist believed that Patty's strong, lifelong Catholic faith would deter her from suicide. I held her hand at Mass the day before. Little did we know she would be gone the next day.

So, after 67 years, we live on with the great memories while wrestling with the mystery of suicide. There won't be any new memories. Lives have changed.

In retrospect, I have come to the realization that instead of assigning a 5% chance that Patty would commit suicide, it should have been a 95% chance. This is easy for me to say one year later.

However, this is not about me or Patty's family. It is about the millions of families that deal with mental illness on a daily basis. They must talk about suicide with each other constantly. They must be direct, open and honest in communications.

Patty was feeling trapped. She wanted her unbearable pain to end. Ninety percent of people who commit suicide in the United States suffer debilitating mental illness, according to the National Institute of Mental Health. The reasons people choose suicide are multilayered, and there is no easy explanation.

What was she thinking? How long had she planned it? Did she have a plan? Why did she do it at that time? Could we have done anything to change her mind? These are some of the questions we now ask.

One of our father's favorite words was fakery. The definition of fakery is the inclination or practice of misleading others through lies or trickery. How long did Patty's fakery go on? Everything makes sense when one is suicidal.

Could we have prevented her suicide? This is the question that will be with our family forever with no answer. I find some solace in believing she was determined to commit suicide. I may be deceiving myself, but I need to find some positives in this tragedy.

Should we have been trained to recognize the signs and symptoms of suicide? Yes. Patty had a special relationship with her doctor. She saw him often, and he had guided her successfully through her previous bouts of depression. This time was different. Four months of pacing, non-eating and total withdrawal had consumed her. We discovered that drugs are not always the answer to make people better. There is no magic cure for depression.

Americans are not prepared to talk about mental illness or suicide because of the stigma. It leaves us with emotional, moral and religious scars. Suicide brings with it an ache, a chaos and a darkness. There is no reason to feel blame or shame: 45.6 million American adults are living with mental illness.

How can someone truly recognize the signs that a loved one may be contemplating suicide? Nobody can predict a suicide. You must be prepared to help someone you love who one day may have a suicidal crisis. Take all talk of suicide seriously. Constantly ask the direct questions, "Are you thinking about suicide?" or "Are you having suicidal thoughts?" Do not treat the threat lightly, even if your loved one jokes about it. They are expressions of extreme distress.

Get your loved one help immediately by taking him or her to the emergency room, calling 911 or the police department, calling a suicide hotline or calling the doctor. Do not leave the person alone. Make sure he or she has no access to means of harm; this includes cords of all kinds.

With a shortage of psychiatric beds, patients must be considered a danger to themselves or others for inpatient admission. Patients must communicate their dangerousness or distress in order to guarantee that they will be admitted for further treatment.

The idea of certainty in our life is an illusion in place so we can function in everyday life. But nothing is certain. Suicide throws out this notion of certainty and forces us to realize that life is a gift. Remember the 95% rule.