2014 Smart Tax Moves

You may be able to save a substantial amount on your taxes if you take the appropriate steps now. With the end of the year approaching quickly, smart tax planning can help you reduce the taxes you’ll owe on April 15th.

Give to Charity

Not only is the holiday season a great time to give to charity, but these donations could add up to a significant tax deduction. You must, however, itemize any donations that you make to charity – including any clothing or household items.

Thinking about donating more than $250 cash to charity? Hang on to your canceled check as a receipt– and have the charity acknowledge your donation.

If you’re considering donating your car that is worth more than $500 to charity, you deduction may be limited to the amount the organization is able to sell it for. However, you may be able to claim a larger deduction based on the car’s fair market value.

Review Your Portfolio

If you are thinking about selling appreciated securities or other assets, doing so by end of year will save you money. You should never allow your taxes to dictate your portfolio strategy, but if you are already planning on selling some assets, doing so by the end of the year would be wise.
Gift to Family Members

You can gift up to $14,000 to as many individuals as you would like up to December 31st without filing a gift tax return. Married? You and your spouse are able to give up $28,000 per individual.

Convert to a Roth

Unlike withdrawals from your traditional IRA, Roths are tax-free and penalty-free if you are over 59 ½ and the converted account has been open for at least five years. If your income is expected to increase, you may consider opening a Roth vs. a traditional IRA for these tax benefits.

Clean Out Your Flexible Spending Account

Last year, the Treasury Department changed the rules so that companies could allow employees to carry over $500 in their medical flexible spending accounts (FSAs) from one year to the next. If your employer will not rollover your balance, then you may need to focus on spending the money in your FSA before the end of the year, or risk losing the balance in your FSA.

Ensure Your Return is Penalty-Proof

Avoid an underpayment penalty by boosting your withholding now. If you expect that you will owe on your 2014 tax return, you may prepay 90% of what you think you may owe in the spring. This will ensure that you do not get hit with an underpayment penalty.

Plan Your Itemized Deductions

If your income is expected to drop next year, your deductions will become more important this year. In this case, you will want to pay deductible expenses before near end. Conversely, if you expect your income to increase, hold off on making any charitable contributions or any other deductible expenses, as these will be more valuable if paid in 2015.

Giving Large Amounts to Charity

If you are planning to give a significant amount to charity this year, it may be a good idea to give appreciated stocks or mutual fund shares. This will boost your savings on your tax return. Instead of the contribution deduction being worth how much you paid for the asset, the charitable contribution deduction will actually be the fair market value of the securities on the date of the gift. And, you’ll never have to pay tax on the profit.

If for some reason the charity that you are planning to give to does not accept donations of securities, you may want to open a donor-advised fund instead. Contact our office today to learn more about these funds.

Give Securities

Consider shifting your income to you parents or children by gifting securities. If your parents or children fall in the 10% to 15% tax bracket, they may qualify for the 0% tax rate on long-term capital gains. For assistance with gifting securities to family members to take advantage of tax breaks, please contact our office.

Add to Your 401 K

Any money that you contribute to your 401K by the end of the year will help lower your tax bill, since it lowers your income. Now is the time to direct any extra dollars to your 401K, if you haven’t already maxed out your contribution for the year.

Withhold More from Your Refund

Americans like receiving a large lump of money each tax season – we are addicted to refunds. This is basically giving the government a loan each month, as your taxes are deducted from your income, and then disbursed during tax season. Wouldn’t you rather earn your income as you are working?

To fix this, simply file a revised W4 Form with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld.

Mutual Fund Purchases

It is important to be aware of the tax trap of end of year distributions in mutual funds. Most funds save the bulk of their capital gains and dividend payouts until the end of the year. On a certain day in December, these payments are made to shareholders. Therefore, you are required to pay taxes on these distributions, even if you’ve only owned the funds for a few days.

For more information about any of these smart end-of-the-year tax moves, please contact our office today.

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Important 2014 Tax Developements

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood.Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Availability of premium credit for health insurance purchased on federal exchange.A credit is available for qualifying individuals who purchase health insurance on an exchange.The credit is payable in advance if the taxpayer chooses.Income affects the amount of the credit, so the taxpayer must go through a special computation when he files his return to see if he received too much or too little of the credit.A controversy has erupted concerning the credit.The statute makes the credit available for insurance purchased on an exchange established by a state.A federal exchange was established for many states that did not establish their own exchanges.The IRS has issued regulations making the credit available for insurance purchased on a federal exchange, but two Circuit Courts reached opposite results on the validity of these regulations.One upheld them, while the other said they were invalid.However, the latter decision was put on hold because, subsequently, that circuit agreed to have the issue considered by all of the judges in the circuit.Depending on what happens in that and other cases, the issue might ultimately have to be resolved by the Supreme Court.

More regulations and guidance on the premium credit.The regulations allowing the credit for insurance purchased on a federal exchange were issued in 2012.They also covered other basic matters pertaining to the credit but did not address a number of issues that could come up in specialized situations.Recently, the IRS issued additional regulations on the credit.Among other things, these regulations address the specialized situations that were left out of the 2012 regulations.For example, they explain how to reconcile advance payments with credit amounts in the case of divorced taxpayers and married taxpayers who file separately.They also provide rules for the interaction between the credit and the deduction for the health insurance costs of a self-employed individual.At the same time, the IRS, in separate guidance, provided two optional computation methods that a taxpayer can use to avoid the circular computations that would otherwise apply if he qualified for both the deduction for health insurance costs for self-employed individuals and the premium tax credit.

Publication outlines exemptions from penalty for not having health coverage.The IRS has released Publication 5172, Facts about Health Coverage Exemptions.It is a one-page outline of the exemptions from the individual shared responsibility provisions of the Affordable Care Act (ACA), also referred to as the individual mandate.Under the ACA provision, beginning in 2014, individuals and their family members must have qualified health insurance (i.e., minimum essential coverage), make a shared responsibility payment when filing their federal income tax return, or qualify for an exemption.A taxpayer obtains an exemption from either the Health Insurance Marketplace or the IRS, depending on the type.All exemptions are reported on the tax return, although a taxpayer is automatically exempt if he doesn't have to file a return because his income is below the filing threshold for his status.A brief description of the available exemptions and where a particular exemption may be obtained (IRS, Marketplace or Either) follows:

• Members of certain religious sects (Marketplace)
• Short coverage gap (IRS)
• Certain non-citizens (IRS)
• Coverage is considered unaffordable (IRS)
• Household income below the return filing threshold (IRS)
• Members of federally-recognized Indian tribes (Either)
• Members of health care sharing ministries (Either)
• Incarceration (Either)
• Hardships (Either depending on which hardship exemption is claimed)

Money market gains and losses simplified.Historically, money market funds were allowed to have a stable value of $1 per share.Recently, the Securities and Exchange Commission started requiring certain money market funds to price shares in a manner that more accurately reflects the market value of the funds' underlying portfolios.With these funds, the share price "floats."If a shareholder frequently purchases and redeems shares (as is the case where the fund is used as a "sweep arrangement"), the shareholder may experience a high volume of small gains and losses.The IRS has provided a simplified method of accounting for such gains and losses.This method simplifies tax computations by basing them on the aggregate of all transactions in a period and on aggregate fair market values.The IRS also has provided an exemption from the wash sale rule (i.e., the rule that disallows a loss realized by a taxpayer on a sale or other disposition of fund shares if, within a period beginning 30 days before and ending 30 days after the date of the sale or disposition, he acquires substantially identical stock or securities) for the new floating value money market fund shares.

Favorable result for taxpayer who sold home after converting it to rental property.If certain requirements are met, a married couple filing jointly can exclude up to $500,000 of gain on the sale of their residence.Under the passive activity losses (PAL) rules, losses from rentals and other passive activities generally can't offset passive income, but such losses can be so used when the taxpayer disposes of his entire interest in the activity.In such cases, the freed up losses usually offset gain from the disposition.These rules could have produced a negative result for a married couple who converted their home to a rental, in the next few years had $30,000 of losses that were suspended under the PAL rules, and then sold the home for a gain of $100,000.The IRS determined that the gain qualified for the homesale exclusion and that the taxpayers did not have to offset the $30,000 of losses against the $100,000 excluded gain.This was good for the taxpayers because it meant that they could use the $30,000 of losses to offset other income.

Simplified per-diem increase for post-Sept. 30, 2014 travel.An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE).If the rate paid doesn't exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2.In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status.This rate varies from locality to locality.Instead of using actual per-diems, employers may use a simplified "high-low" per-diem, under which there is one uniform per-diem rate for all "high-cost" areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS.The IRS released the "high-low" simplified per-diem rates for post-Sept. 30, 2014 travel.The high-cost area per-diem increases $8 to $259, and the low-cost area per-diem increases $2 to $172.

Relief gives automatic tax deferral to many in Canadian retirement plans.The IRS has provided that eligible U.S. citizens and residents who are beneficiaries of certain Canadian retirement plans will be treated as having made an election under the U.S.-Canada Income Tax Treaty to defer U.S. income tax on income accruing in their retirement plans until a distribution is made.This relief is retroactive to the first year in which they would have been entitled to make the election under the treaty.

Year-end planning: Careful handling of capital gains and losses can save taxes

Individuals who lost money in the stock market in 2014 may have other investment assets that have appreciated in value. As this article explains, these taxpayers should consider the extent to which they should sell appreciated assets before year end (if their value has peaked) and thereby offset gains with preexisting losses.

Capital gain and loss basics. Long-term capital losses are used to offset long-term capital gains before they are used to offset short-term capital gains. Similarly, short-term capital losses must be used to offset short-term capital gains before they are used to offset long-term capital gains. Non-corporate taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income (AGI).

For 2014 and 2015, a non-corporate taxpayer is subject to tax at a rate as high as 39.6% on short-term capital gains and ordinary income. Long-term capital gains are taxed at a rate of:

• 20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income,
• 15% if they would be taxed at above 15% but below 39.6% if they were taxed as ordinary income,
• 0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income.

Note that for purposes of the 3.8% net investment income tax (NIIT) under Code Sec. 1411, net investment income (NII) includes net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property, other than property held in a trade or business to which the NIIT doesn't apply, minus the deductions that are properly allocable to that net gain. Gains taken into account in computing NII (to the extent not offset by capital losses) include gains from the sale of stocks, bonds, and mutual funds and capital gain distributions from mutual funds.

Restricting annual payouts from retirement plans and IRAs to the required minimum distribution (RMD) (and taking cash from other accounts as needed) may help some taxpayers to take advantage of a lower capital gains rate. Note, however, that gain on the sale of collectibles or section 1202 stock is taxed at the lesser of 28% or the rate at which it would be taxed if it were taxed as ordinary income, and unrecaptured section 1250 gain on the sale of depreciable real property is taxed at the lesser of 25% or the rate at which it would be taxed if it were taxed as ordinary income.

How to make the most of losses. A taxpayer should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken. However, this is not just a tax issue. As is the case with most planning involving capital gains and losses, investment factors need to be considered. A taxpayer won't want to defer recognizing gain until the following year if there's too much risk that the value of the property will decline before it can be sold. Similarly, a taxpayer won't want to risk increasing the loss on property that he expects will continue to decline in value by deferring the sale of that property until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, the taxpayer should take steps to prevent those losses from offsetting those gains.

Illustration:

Early in 2014, Dan, a single taxpayer in the 35% tax bracket, recognized short-term capital gains of $150,000. He has not recognized any other capital gains or losses in 2014. Dan owns Corp W bonds with a basis of $800,000 that he has held for a number of years and are now worth $900,000, due solely to the decline in interest rates that took place after he acquired the bonds. He'd like to sell the bonds and invest the proceeds elsewhere, and doesn't expect much movement in Corp W bonds over the next three or four months. Dan also owns some stock in Corp Z that he has held for more than one year, which has a value of $700,000 and a basis of $825,000. Dan expects the value of this Corp Z stock to either remain about the same or decline even more. He would like to sell the Corp Z stock.

If in 2014, Dan sells the Corp Z stock, recognizing a $125,000 long term capital loss, and also sells the Corp W bonds, recognizing a $100,000 long-term capital gain, the long-term capital gain will be offset completely. Additionally, Dan will have $25,000 of long-term capital loss to offset $25,000 of his short-term capital gain. However, he'll pay a $43,750 tax on the $125,000 balance of his short-term capital gain (35%).
If Dan sells the Corp Z stock in 2014, and waits until 2015 to sell the Corp W bonds, he will have a long-term capital loss of $125,000 on the stock sale, which will offset $125,000 of his short-term capital gains if he has no other capital gains or losses in 2014. For 2014, he'll pay $8,750 in tax on the remaining $25,000 of short-term capital gain ($25,000 × .35), and for 2015, he'll pay tax of $15,000 on the Corp. W bond gain ($100,000 × .15) for that year. His total tax cost over 2014—2015 will be $23,750 ($8,750 + $15,000).

Thus, by taking the long-term capital losses in 2014, and deferring the long-term capital gains until 2015, Dan saves $20,000 in taxes in the two years combined ($43,750 less $23,750).  However, another consideration may be relevant to taxpayers in the situation described above. If a taxpayer doesn't have a net capital loss for 2014, but expects to realize capital losses in 2015 well in excess of the $3,000 ceiling, he should consider shifting some of the excess losses into 2014. That way, the losses can offset 2014 gains and up to $3,000 of any excess loss will become deductible against ordinary income in 2014.

How to preserve investment position after recognizing gain or loss on stock. For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year in some situations. But suppose the stock is also an attractive investment worth holding onto for the long term. There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called "wash sale" rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). Thus, a taxpayer can't sell the stock to establish the tax loss and simply buy it back the next day. However, he can substantially preserve an investment position while realizing a tax loss by using one of these techniques:

• Double up. Buy more of the same stocks or bonds, then sell the original holding at least 31 days later. The risk here is of further downward price movement.
• Sell the original holding and then buy the same securities at least 31 days later.
• Sell the original holding and buy similar securities in different companies in the same line of business. This approach trades on the prospects of the industry as a whole, rather than the particular stock held.
• In the case of mutual fund shares, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy. A similar strategy can be used with Exchange Traded Funds.

Observation: The wash sale rule applies only when securities are sold at a loss. As a result, a taxpayer may recognize a paper gain on stock in 2014 for year-end planning purposes and then buy it back at any time without having to worry about the wash sale rule.

Four year-end retirement plan reminders

Retirement plans are one of the best ways to cut your current tax bill while you put money away for your retirement years. Here are four year-end reminders.

1. Time is running out for 2014 contributions to 401(k) plans. This year you can put up to $17,500 in your 401(k); if you'll be 50 or older by December 31, that limit increases to $23,000.

2. If you have a SIMPLE retirement plan, the 2014 contribution limits are $12,000 if you're under 50 and $14,500 if you're 50 or older.

3. IRA contribution limits for this year are $5,500 for those under 50 and $6,500 for those 50 and older.

4. If you're over 70½ years old, you generally have to take a minimum distribution from your IRA by December 31. If you just turned 70½ this year, you can either take your first required minimum distribution by December 31, or you can wait as long as April 1, 2015, to take the first distribution. Keep in mind that if you wait, you'll have to take two distributions in 2015. Unless you're still working, these rules also apply to other retirement plans (such as 401(k)s). Note, however, that no distribution requirements apply to Roth IRAs.

For further details or for any assistance with your year-end tax planning, give us a call.

Pay attention to the tax rules on deducting charitable gifts

As 2014 winds down, you may be planning to complete your charitable giving for this year. Here are a few tax concerns to keep in mind.

1. Your gift is tax-deductible only if it is made to a "qualified" charity.

2. The value of services you render to a charity is not deductible.

3. Out-of-pocket expenses while doing volunteer work for a charity, such as telephone charges, travel, and uniforms, are deductible.

4. Automobile expenses may be taken at the standard 14 cents per mile, or you may deduct your actual expenses.

5. Tickets to charitable events are only deductible to the extent the price exceeds the value received. For example: You pay $35 for a show put on by the charity, and the normal price of the ticket is $10. Your deduction is limited to $25.

6. Cash contributions of any amount must be substantiated by proper records. For contributions under $250, a bank record, cancelled check, or credit card record will usually suffice.

7. Contributions of $250 or more must generally be substantiated by a written acknowledgment from the charity obtained before you file your tax return.

8. If non-cash contributions (other than publicly traded securities) exceed $5,000, a qualified appraisal is required.

9. Charitable contributions are deductible only if you itemize, and there are limits as to the amount of donations that you can deduct in any one tax year.

If you have questions about the tax issues related to charitable giving, contact our office.