|This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.|
|Year-End Tax Planning for Individuals|
Once again, tax planning for the year ahead presents more challenges than usual, this time due to the numerous tax extenders that expired at the end of 2013.
These tax extenders, which include nonbusiness energy credits and the sales tax deduction that allows taxpayers to can elect to deduct state and local general sales taxes instead of state and local income taxes, may or may not be reauthorized by Congress and made retroactive to the beginning of the year.
More significant however, is taxable income in relation to threshold amounts that might bump a taxpayer into a higher or lower tax bracket, thus, subjecting taxpayers to additional taxes such as the Net Investment Income Tax (NIIT) or an additional Medicare tax.
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.
Tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. General tax planning strategies that taxpayers might consider include the following:
Accelerating Income and Deductions
Accelerating income into 2014 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare tax or Net Investment Income Tax (see below).
Here are several examples of what a taxpayer might do to accelerate deductions:
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2014, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
If you haven't signed up for health insurance this year, it's not too late to do so--and avoid or educe any penalty you might be subject to. Healthcare subsidies are also a potential tax planning issue. Please contact us if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2014 tax return next April.
High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.
If you're a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax as well (more about the NIIT below).
Alternate Minimum TaxThe Alternative Minimum Tax (AMT) exemption "patch" was made permanent by the American Taxpayer Relief Act (ATRA) and is indexed for inflation. It's important not to overlook the effect of any year-end planning moves on the AMT for 2014 and 2015.
Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.
Residential Energy Tax Credits
Non-Business Energy CreditsATRA extended the non-business energy credit, which expired in 2011, through 2013 (retroactive to 2012); however, it has not been reauthorized by Congress. For years prior to 2014, taxpayers could claim a credit of 10 percent of the cost of certain energy saving property that was added to their main home.
Residential Energy Efficient Property Credits
The Residential Energy Efficient Property Credit is available to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. In addition, taxpayers are allowed to take the credit against the alternative minimum tax (AMT), subject to certain limitations.
Qualifying equipment must have been installed on or in connection with your home located in the United States.
Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.
The tax credit is 30 percent of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.
Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer's tax credit certification statement, which can usually be found on the manufacturer's website or with the product packaging.
What's included in this tax credit?
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Investment Gains and Losses
This year, and in the coming years, investment decisions are likely to be more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2014 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.
If your tax bracket is either 10 or 15 percent (married couples making less than $73,800 or single filers making less than $36,900), then you might want to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. If you fall into the highest tax bracket (39.6 percent), the maximum tax rate on long-term capital gains is capped at 20 percent for tax years 2013 and beyond.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are usually taxed at a much higher tax rate than long-term gains--up to 39.6 percent in 2014 for high income earners ($406,750 single filers, $457,600 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000.
Net Investment Income Tax (NIIT)
Starting in 2013, a 3.8 percent tax is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long term investments. Business income is not considered subject to the NIIT provided the individual business owner is materially active in the business.
Please call us if you need assistance with any of your long term tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.
Be sure to call us if you'd like more information on how dividends paid out by mutual funds affect your taxes this year and next.
Year-End Giving To Reduce Your Potential Estate Tax
The federal gift and estate tax exemption, which is currently set at $5.340 million is projected to increase to $5.43 million in 2015 (Bloomberg BNA). ATRA set the maximum estate tax rate set at 40 percent.
Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor's assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $14,000 a year per donee.
Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $28,000 ($14,000 each). Though what's given may come from either you or your spouse or from both of you, both of you must consent to such "split gifts".
Gifts of "future interests", assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don't qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.
Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift's true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.
Gift tax returns for 2014 are due the same date as your income tax return. Returns are required for gifts over $14,000 (including husband-wife split gifts totaling more than $14,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $14,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not "adequately disclosed".
Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced child tax rate, generally 10 percent, where the first $1,000 in investment income is exempt from tax and the next $1,000 is subject to a child's tax rate of 10 percent (0 percent tax rate on long-term capital gains and qualified dividends).
Other Year-End Moves
Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don't already have one. It doesn't need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year's return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($17,500 for 2014), plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don't apply.
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 10 percent of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2014, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,250 for single coverage or $2,500 for a family.
These are just a few of the steps you might take. Please contact us for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.
|Year-End Tax Planning for Businesses|
While the fate of several business-related tax extenders such as R & D credits, bonus depreciation, and Section 179 expensing that expired at the end of 2013 is uncertain, there are still a number of end of year tax strategies businesses can use to reduce their tax burden for 2014.
Purchase New Business Equipment
Section 179 Expensing. Business should still take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2014 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $25,000 for the first $200,000 of property placed in service by December 31, 2014. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. In addition, unless Congress reauthorizes it, the bonus depreciation expired at the end of 2013 and is not available for 2014.
While most businesses follow a calendar year, for those that don't there is an exception to the $25,000 cap that allows those business to take advantage of the $500,000 Section 179 benefit. However, only businesses whose calendar year begins in 2013 and ends in 2014 can take advantage of this.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Please contact our office if you have any questions regarding qualified property.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here's a simplified explanation:
Conventions. The tax rules for depreciation include "conventions" or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
If you're planning on buying equipment for your business, call us first. We'll help you figure out the best time to buy it to take full advantage of these tax rules.
Other Year-End Moves to Take Advantage Of
Business Energy Investment Tax Credit
Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016 and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2014 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2014. Call us today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
For more on this topic, see the article below about common budgeting errors, but if you need help developing a budget for your business don't hesitate to call us.
Call Us First
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2014. If you'd like more information about tax planning for 2015, give us a call. We'll sit down with you, discuss your specific tax and financial needs, and develop a plan that works for your business.
|Tips for Taxpayers with Foreign Income|
If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship. If you're a taxpayer with foreign income, here's what you should know:
1. Report Worldwide Income. The law requires U.S. citizens and resident aliens to report any worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.
2. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $99,200 of their wages and other foreign earned income they received in 2014. Please contact us if you have any questions about foreign earned income exclusion.
3. Don't Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.
4. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Please contact us if you're not sure which forms you need to file.
5. Report Foreign Accounts and Assets. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.
Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds:
The threshold is higher for individuals who live outside the United States and thresholds are different for married and single taxpayers. In addition, penalties apply for failure to file accurately.
Please contact us if you need additional information about thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided.
Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2014 must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts ("FBAR"). An individual may have to file both forms and separate penalties may apply for failure to file each form.
This is not a tax form and is due to the Treasury Department by June 30, 2015. If you need help with this, please don't hesitate to call us.
6. Consider the Automatic Extension. U.S. citizens and resident aliens living abroad on April 15, 2015, may qualify for an automatic two-month extension to file their 2014 federal income tax returns. The extension of time to file also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.
7. Get Tax Help. If you're a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, please don't hesitate to contact us.
|Three Most Common Budgeting Errors|
When it comes to creating a budget, it's essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them.
Call our office if you want to discuss setting up a budget to meet your business financial goals. We're happy to help.
|Ten Facts about Capital Gains and Losses|
When you sell a 'capital asset,' the sale usually results in a capital gain or loss. A 'capital asset' includes most property you own and use for personal or investment purposes. Here are 10 facts you should know about capital gains and losses:
1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.
2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
3. You must include all capital gains in your income. You may be subject to the Net Investment Income Tax, which went into effect in 2013. The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.
4. You can deduct capital losses on the sale of investment property. You can't deduct losses on the sale of personal-use property.
5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.'
7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.
8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year's tax return. You will treat those losses as if they happened that year.
10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.
If you have any questions about capital gains and losses, please call us.
|Tax Tips for Individuals Selling Their Home|
If you sell your home and make a profit, do you know that the gain may not be taxable? That's just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.
1. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.
2. There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For additional details, please give us a call.
3. The maximum amount of gain you can exclude is $250,000. This limit is $500,000 for joint returns. In addition, the Net Investment Income Tax will not apply to the excluded gain.
4. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
5. You must report the sale on your tax return if you can't exclude all or part of the gain. And you must report the sale if you choose not to claim the exclusion. That's also true if you get Form 1099-S, Proceeds From Real Estate Transactions. Keep in mind that if you report the sale you may be subject to the NIIT. Don't hesitate to contact us if you need assistance with this.
6. Generally, you can exclude the gain from the sale of your main home only once every two years.
7. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
8. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale.
9. If you sell your main home at a loss, you can't deduct it.
10. After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.
Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.
Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.
If you have any questions, please call us. We're here to help!
|Tax Relief to Drought-Stricken Farmers|
The IRS has extended the time that farmers and ranchers have to replace livestock if they were forced to sell it due to exceptional, extreme, or severe drought. If you're eligible, this may help you defer tax on any gains you received from the forced sales. The relief applies to all or part of 30 states affected by drought.
A taxpayer may determine whether exceptional, extreme, or severe drought is reported for any location in the applicable region by reference to U.S. Drought Monitor maps that are produced on a weekly basis by the National Drought Mitigation Center. U.S. Drought Monitor maps are archived at Drought Monitor maps.
In addition, in September of each year, the IRS publishes a list of counties, districts, cities, boroughs, census areas or parishes (hereinafter "counties") for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxpayers may use this list instead of U.S. Drought Monitor maps to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region.
Here are seven facts you should know about this relief:
If you have any questions about whether you're eligible for this particular tax relief, don't hesitate to contact us.
|Four Things to Know about Net Investment Tax|
Certain taxpayers may be subject to the Net Investment Income Tax, which went into effect last year, in 2013. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things that you should know about this tax:
1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.
2. Net investment income. This amount generally includes income such as:
Keep in mind however, that this list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.
After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Don't hesitate to call us if you need help figuring out your net investment income or MAGI (modified adjusted gross income).
3. Income threshold amounts. You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:
Filing Status / Threshold Amount
4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.
For more information about this topic please contact us.
|Tax Due Dates for November 2014|
Employers - Income Tax Withholding. Ask employees whose withholding allowances will be different in 2015 to fill out a new Form W-4. The 2015 revision of Form W-4 will be available on the IRS website by mid-December.
Employees who work for tips - If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the third quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in October.
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