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Year-End Tax Planning for Individuals

By Linda Freeman on November 17, 2014 in Articles, Linda Freeman CPA, Tax
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2015 tax planning for individuals

Once again, tax planning for 2014 presents its share of challenges due to numerous changes and the uncertain status of tax provisions that expired at the end of 2013. In addition, the power shift as a result of the November election results could produce further changes to the existing laws, possibly at the last minute, making tax planning a very slippery slope for this year.

In the meantime, let’s take a look at some of the tax strategies that you can use right now, given the current tax situation.

Minimizing the Impact
Individual marginal tax rates have remained the same in 2014. However, due to inflation, the top rate of 39.6% has now been imposed on taxable income over $406,750 for single filers and $457,600 for married taxpayers filing jointly.

To minimize the impact of the higher tax brackets, taxpayers should consider taking steps to keep their income below the various threshold levels, if possible, by spreading income over a number of years or offsetting the income with above-the-line deductions. In particular, spikes in income should be carefully managed – keeping a close eye on transactions such as Roth IRA conversions, taxable sales of assets, and the timing of income earned from pass through S-corporations or partnerships. Specific steps could include:

  • Sell stocks that have decreased in value below your original cost in order to utilize those losses. Use caution, however, to not create a net capital loss in excess of $3,000 since any net capital loss in excess of that amount is not deductible in the current year. You can still preserve your investment position in these stocks if you choose, by buying back those securities at least 31 days after the sale.
  • Compare the current value of assets related to any conversions made during 2013 from a traditional IRA to a Roth IRA. If the account value has declined, consider backing out of the transaction in order to prevent paying tax on the conversion at an inflated value. You can “re-characterize” the transaction by transferring the assets (plus or minus investment earnings/losses) back into a traditional IRA account.
  • If you became eligible to make health savings account (HSA) contributions this year, consider maximizing the tax benefit by making a full year’s worth of deductible HSA contributions for 2014. And don’t overlook the opportunity to fund an additional $1,000 for taxpayers who will be 55 years old by the end of the year.

Maximizing Deductions
A number of deductions, brackets, and limitations have been adjusted, as follows:

  • The standard deduction rises to $6,200 for singles as well as those who are married filing separately. The standard deduction for married couples filing jointly has increased to $12,400. The standard deduction for heads of household rises to $9,100.
  • The phase-out for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
  • The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly).

While higher income earners will experience a decrease in the deductibility of their personal exemptions and itemized deductions, they can consider the following:

  • Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. The expense is still deductible this year even if the credit card balance is paid in the following year.
  • Keep good records. In particular, make sure you have the required documentation for charitable contributions. For cash donations of more than $250, be sure you have a copy of your canceled check and the receipt from the charitable organization. For donated property, a detailed listing, with the fair market value of each item, along with the receipt from the organization will be needed. You will also need to be able to demonstrate that the donated property was in “good” shape for your deduction to count. Additional documentation is required for noncash donations of more than $5,000 — including a qualified written appraisal along with acknowledgements from the appraiser and the charitable organization.
  • Consider donating stock that has increased in value to your favorite religious or charitable organization. If you have owned that stock for more than one year, you can generally deduct the full fair market value of those shares without paying tax on the appreciation. As an added bonus, donations of publicly-traded securities are exempt from the requirement to obtain a written appraisal – which saves the cost of obtaining the appraisal.

Subject to limitations that could be imposed due to the Alternative Minimum Tax rules, you might also benefit from the following:

  • Pay state estimated tax installments in December instead of at the January due date. However, make sure the payments are based on a reasonable estimate of your state taxes.
  • Pay your entire property tax bill, including installments due in year 2015, by year-end. This does not apply to mortgage escrow accounts, which are prepayments of your “reserve” rather than actual property tax assessments.
  • Miscellaneous Itemized Deductions, such as expenses for financial planning, tax preparation, and unreimbursed employee business expenses, are deductible only if the total of these items exceeds two percent of your adjusted gross income. Grouping these deductions in alternating years can be an effective tax-planning strategy to reach the threshold level.

Other Tax Considerations
Starting this year, as required by the Affordable Care Act, individuals who fail to carry “adequate” health insurance will face a penalty. More specifically, nonexempt taxpayers will owe the penalty if they don’t have so-called minimum essential coverage. There are a number of exceptions to the penalty, including concessions for lower-income individuals as well as those who had previous coverage that was no longer available under the Affordable Health Care Act.

Late last year, the IRS announced a new exception to the dreaded “use-or-lose” rule for health care flexible spending accounts, also known as FSAs. Under the exception, employers can allow their employees to carry forward up to $500 of any unused balance to the subsequent year. The new carry forward exception is in lieu of allowing a grace period through March 15th of the following year to incur enough expenses to use up your unused balance from the previous year. In other words, your company’s health care FSA plan can allow either the $500 carry-forward OR the grace period, not both.

The annual exclusion for gifts remains at $14,000 for 2014, ($28,000 for husband-wife joint gifts to any third person). Gifts at or below this threshold can be made tax free without counting this toward the lifetime estate exclusion. There is no limit on the number of individuals to whom the gifts can be made, but you can’t carry over unused exclusions from one year to the next. Those gifts are not tax deductible, but these transfers can minimize future taxable investment earnings and can help achieve estate planning goals.

Keep an eye on the estimated tax requirements. The tax changes that came into effect last year may already have resulted in an increased tax liability, and possibly a balance due. If your tax situation is expected to be similar in 2014, an increase in tax payments is required. Submitting estimated tax vouchers and payments is on option to get your payment levels up to the required levels. Increasing your withholding before year-end is another option and can avoid or reduce any estimated tax penalty that might otherwise be due. On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

Expired Tax Provisions
Previously expired tax breaks include: the option to deduct state and local sales and use taxes instead of state and local income taxes, tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes, deduction for expenses of elementary and secondary school teachers, “above the line” deduction for higher education tuition and related fees (keep in mind that education tax credits were previously extended), tax-free treatment for forgiven mortgage debt, deductibility of mortgage insurance premiums on a personal residence, and a tax credit for energy-saving home improvements. In prior years, it was not uncommon for certain provisions to be retroactively reinstated. The House and Senate have indicated that they have different approaches to dealing with these provisions. The House has been considering whether each of the expired provisions should be dealt with separately: extended, made permanent, or allowed to lapse. The Senate, however, is focused on a straight, two-year extension of all the expired provisions. Even with the shift of control to the Republican party after the recent elections, there is no guarantee that a tax extenders package will pass in the ensuing lame-duck session.

Given the unique opportunities and challenges faced by taxpayers in today’s uncertain legislative environment, year-end tax planning has become even more critical. It’s important to keep adjusted gross income (AGI) down to avoid reduction or elimination of the many tax breaks that phase out over higher levels of AGI, make the best tax use of losses, and take full advantage of the tax credits available. Obviously, taxes are not the only issue to consider when making decisions about your financial plans. And, in many cases, tax strategies need to be evaluated to determine the effect on your specific set of facts and circumstances. Either way, now may be the time to call your advisor at MarksNelson about these tax law changes and their impact on your total tax liability.

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For Linda Freeman, tax season is every season. Linda works with her clients year-round to minimize their tax liability as much as possible.


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Linda FreemanView all posts by Linda Freeman