7 big tax changes in 2015

As 2014 draws to a close, it's nearly time for the annual deluge of tax forms – including 1098's reporting mortgage interest or W-2's from employers reporting your annual wages.

But while gathering documents for the past year's taxes is important, equally pressing is the need to adjust your budget to account for changes in the tax code that take effect starting on New Year's Day.

After all, you have been paying taxes and making retirement contributions all year even though taxes don't need to be filed until the following April. While there are a handful oflast-minute strategies to play catch up on 2014 tax obligations, the sad reality is that many folks who have waited until now to think about their taxes are too late.

A better strategy is to plan ahead based on what you think you will owe the Internal Revenue Service, and be proactive on your withholding and savings strategies.

Regardless of what your situation looks like in 2014, here are seven big changes that will affect a large number of taxpayers starting in January 2015.

Health Insurance Penalty: Part of the Affordable Care Act mandates that all Americans have health insurance, or pay a tax penalty as a result. In 2014, the penalties are 1% of your household income or $95 per person – whichever is greater. But in 2015, those penalties ramp up significantly to 2% of total household income, or $325 per person. That can really add up for a middle-class family of four. If you're not covered and paying a penalty on your 2014 taxes, make sure you get health insurance ASAP to avoid penalties as we enter a new tax year in January.

401(k) Limits: The limit on employee contributions to a 401(k) plan will increase to $18,000, up $500 from 2014's cap. That means you tell your payroll department to adjust up your contribution starting on the first of the year to ensure you save the maximum allowable in 2015. Also, the "catch-up" allowance for those over than 50 has also been increased, allowing for an additional $6,000 in contributions instead of the $5,500 cap previously. These new contribution levels are also applicable to 403b accounts and most 457 retirement plans as well.

Flexible Spending Account Limits: The annual limit on employee contributions to flexible spending accounts is now $2,550 for qualified health care expenses. That's up $50 from 2014, so make sure you opt in for this new maximum amount if you take advantage of a health care FSA.

Standard Deduction: The standard deduction – that is, the basic tax break extended to all Americans each year -- rises to $6,300 for single filers and $12,600 for married taxpayers filing jointly in 2015. That's up $100 and $200, respectively, from 2014 figures. The standard deduction is crucial to tax planning and withholding, because if you cannot itemize enough deductions to surpass this amount, this is the only tax break the government will likely be giving you on next year's tax return.

Tax Brackets: For the new tax year starting in January, income tax thresholds have again been adjusted up for inflation. The highest tax rate of 39.6%, for instance, will now apply to single filers who make over $413,200 and married couples making $464,850. Both figures are up about 1.6% from tax year 2014. For more information on specific income tax brackets by filing status, check out the latest IRS revenue procedure document.

IRA Rollovers: Starting in 2015, you can only make one single rollover from an IRA in a 12-month period. This is a bit tricky, because you can still make as many "trustee-to-trustee" transfers as you wish, moving your money directly from one provider to another. What the new IRS rule targets is the practice of withdrawing all those funds and then re-depositing them in a new account – a tactic some folks were using as a short-term, interest-free loan. To protect yourself, limit all rollovers to direct transfers in 2015 if you plan on moving money more than once.

AMT Changes: The so-called "alternative minimum tax" is quite a headache for many middle-class Americans. Since certain breaks can significantly reduce your tax bill, the IRS created the AMT to set a limit on those benefits – and ensure a minimum tax burden on you. The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 for individuals or $83,400 for joint filers. That's up slightly, about 1.5% from 2014.

Give Yourself the Gift of Year-End Tax Planning

You'll wake up at 4 a.m. to get door-buster deals. You'll clip coupons to save 50 cents on pasta sauce. None of that compares to what you can save by doing a little year-end tax planning. To start, give yourself a gift your can enjoy in your golden years.

Contributing to your retirement account is a great idea. Not only does it help you save on your current year's taxes but it also helps you build that retirement nest egg.

You'll need to go through your human resources department to adjust your 401k contributions, but beefing up your IRA is a lot easier. You can contribute up to $5,500 a year—more if you're over 50 and you have until April 15 to do it. Don't have the cash now? Play with the calendar a little.

You can actually file your return early, claiming the IRA contribution, use your refund and then make the IRA contribution as as long as it's before April 15th,

Another way to save is to spread the wealth and make a donation to charity.

It's good for the community. It's good for your piece of mind, it makes you feel good and at the end of the day, you also save on your taxes and you still have a couple weeks to do that,

If you lessened your taxable income by putting money in a flex spending account, make sure you've used it. While December 31 used to be the deadline, a change in the law means some employers now give you until the end of January, so make plans to see your doctor or get new glasses to use up what's left.

If you do need to sign up for a government-sponsored plan, he says do it now.

Because the penalty for noncompliance goes up significantly in 2015.

The deadline for open enrollment is February 15.

Finally, if you have business-related expenses, get them on the books before the ball drops so you can deduct them on your 2014 taxes. On the flip side, if your sending out invoices for work you've done or services you've provided, you may want to wait.

You might want to consider billing for it in January so you can defer the tax impact of that until next year.

Depending on where you live, you may also be able to lessen your state taxes by putting money into a 529 college savings plan.

Smart Investing Moves To Cut Your Taxes

After the headline risks of the market and inflation, taxes present the biggest obstacle to your building wealth. Your best investment strategy seeks to not only generate returns on your capital but also to save as much of your money as possible to keep it working for you. One of the surest ways to preserve your capital: Reduce your taxes on investment income and gains.

Here are some strategies:

Asset allocation. One of the first rules of wealth accumulation: Sock as much income as possible into a tax-qualified retirement plan, such as an individual retirement account, a 401(k) or a 403(b) if you work for a school or tax-exempt organization. Such plans do give you an immediate and long-term tax advantage, either deferring taxes until your payouts or allowing you to withdraw in retirement tax-free.

For an overall asset-allocation strategy, though, how you place various investments among your tax-qualified plans and your non-qualified investment accounts counts almost as much as your selection of investments. Place your tax-efficient investments in your non-qualified investment accounts and your non-tax efficient investments in accounts that give you a tax break.

• Non-tax efficient investments include securities and income-producing assets that tend to generate more taxable returns, such as taxable bonds, bond funds and dividend-paying stocks or mutual funds.

• Tax-efficient investments include tax-exempt bonds and bond funds, tax-managed mutual funds, exchange-traded funds and broad market stock index funds.

What and when to buy. If you invest in mutual funds in your non-qualified accounts, consider the portfolio holdings of the fund, how much of the portfolio turns over each year and the amount of unrealized gains that exist only on paper.

About your worst move as a mutual fund investor is to buy shares of an actively traded mutual fund that has a high turnover ratio and sits on a boat-load of capital gains. These types of funds notoriously sell their most profitable stocks, especially to meet share redemption demands, and distributing big – and fully taxable – gains to shareholders. That reduces the share price in some proportion to the distribution, which means you the shareholder are left with a lower share price and a taxable distribution.

Instead, consider investing in funds that temper your capital gains through minimizing taxes with tax harvesting – selling some holdings at a loss to counterbalance the gains – or in broad index stock funds that are more passively managed, and don’t run up a lot of cap gains.

If you feel a need to sell securities to lock in gains, use that opportunity for tax harvesting. You can do this each year to keep your target asset allocation in line with your investment objectives.

You use the proceeds of the stocks sold for gains and losses to add to the portion of your asset allocation that needs increasing.

Avoid the 3.8% surtax. Beginning in 2013, if your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 if you file your return with the status of married filing jointly), your investment income above a certain threshold may incur an additional 3.8% surtax. This tax doesn’t affect your income earned in qualified accounts or your income from certain investments, such as tax-exempt bonds and qualified dividend-paying stocks.

Seek the guidance of a qualified tax professional to analyze immediate and long-term implications of your investment decisions.

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.

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.

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

FROM ACCOUNTINGTODAY.COM

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.

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.