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 2014. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). Examples of these currently expired breaks include:
- Deduction of state and local sales and use taxes instead of state and local income taxes;
- Above-the-line-deduction for qualified higher education expenses;
- Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older;
- Exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
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).
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take. Please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
Year-End Tax Planning Moves for Individuals
Defer Income/Accelerate Deductions:
Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out as your income increases. These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
Loss Harvesting:
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
Gifting:
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Basis Issues:
If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
Credit Cards:
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
Affordable Care Act Mandate for Individual Health Insurance:
Beginning in 2014, unless you are covered by an exemption, you are required to maintain basic health insurance coverage (known as minimum essential coverage) for yourself and any of your dependents, or pay a shared responsibility payment (a penalty). The requirement to maintain coverage or pay a penalty is generally called the “individual mandate.”
The penalty is the lesser of: (i) the greater of a flat dollar amount or a percentage of your household income, or (ii) the national average premium for the lowest-level plan providing minimum essential coverage. You must make the shared responsibility payment when you file your federal income tax return.
If you did not have minimum essential coverage at any point in 2014, or believe you may otherwise be subject to this “penalty”, please contact us to discuss the potential impact on your income tax returns.
AMT Considerations:
Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
IRA Conversions:
If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014. Keep in mind, it is also possible to reverse a traditional to Roth IRA conversion that occurred earlier this year.
Required Minimum Distributions (“RMD”)
Take required minimum distributions from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2 . Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015-the amount required for 2014 plus the amount required for 2015.
Flex Spending Accounts (“FSA”):
Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
Health Savings Accounts (“HSA”):
If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.
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 2014. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). Examples of these currently expired breaks include:
- 50% bonus first year depreciation for most new machinery, equipment and software;
- $500,000 annual expensing limitation;
- Research tax credit;
- 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
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).
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take. Please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
Year-End Tax-Planning Moves for Businesses & Business Owners
New IRS “Repair Regulations”:
Businesses may be able to take advantage of the “de minimis safe harbor election” to expense the costs of inexpensive assets and materials and supplies (assuming UNICAP does not apply). To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if your business has an applicable financial statement (“AFS”) (i.e. a certified audited financial statement along with an independent CPA’s report). If there is no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2014.
Fixed Asset Purchases:
Businesses should consider buying machinery and equipment before year-end and, under the generally applicable “half-year convention,” possibly secure a half-years’ worth of depreciation deductions for the first ownership year.
Advanced Expensing of Fixed Assets:
Although the business property expensing option is greatly reduced in 2014 (unless legislation enhances this option for 2014), consider making expenditures that qualify for this option. For tax years beginning in 2014 , the expensing limit is $25,000 when total eligible fixed assets placed in service in the year are $200,000 and less.
Affordable Care Act & Health Insurance Coverage:
Employers with a 100 or more employees (including full-time equivalents (“FTE”)) will need to start providing health benefits to at least 70% of their FTE’s by 2015 and 95% by 2016. Small businesses with 50-99 FTE employees will need to start insuring workers by 2016. If you are an employer described above, and you do not anticipate providing affordable health care to your employees, your company may be subject to a penalty. Contact us to discuss what options are available to you and your company to minimize these penalties.
Passive Activities:
To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
Gifting:
Consider making gifts of business interests sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Health Care Tax Credits:
Health care tax credits have been retroactively available to small businesses with 25 or less full-time equivalent employees since 2010. Your credit could be up to 50% of the premiums paid through a Small Business Health Options Program.
Accrued Bonuses:
Attempt to accelerate the tax deduction for accrued bonuses into 2014 by avoiding these pitfalls: 1. If an employer waits until 2015 to certify that the 2014 performance goals were achieved, or if it has discretion to reduce or eliminate the amount of the bonus payable, the employer must wait until 2015 to deduct the amount of the bonus payments. 2. If the bonus is conditioned in part on a subjective employee evaluation that does not take place until 2015, the employer may not deduct the bonus payments until 2015. 3. Make sure any 2014 accrued year-end bonuses to employees are paid by March 15, 2015.
Marginal Tax Bracket Planning:
A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
Domestic Productions Activities Deduction:
If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
Basis Issues in Pass-Through Entities:
If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you and your company. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.
