Warning: this post is long. Save & Print. Important Year-End Tax Planner: Dear friends, once again, its November, with a new year coming up fast, and so will come the income tax filing season. All Americans will be seeing changes on their 2014 tax returns. Congress continues to discuss last minute items, and you can be assured I’m staying abreast of all the latest changes as they occur. In case you haven’t heard, more than 50 popular tax provisions expired at the end of 2013, and there is presently Congressional gridlock. Without legislative action, individuals could lose benefits such as: * The $250 educator expense deduction * The tuition & fees deduction * The deduction for mortgage insurance premiums * The deduction for state and local sales taxes * Tax-free distributions from IRAs for charitable purposes * Mortgage forgiveness debt relief and businesses won’t get a credit for research activities or be able to immediately deduct half the cost of new business equipment (known as bonus depreciation). Many believe that Congress is waiting until after the elections to act on these ‘tax extenders.’ However, its possible that changes might not come until 2015 and, then again, it’s possible that changes made could be retroactive back to 2014. This could result in a delay to the start of the filing season. In any event, be kind to your tax preparer, and the educational demands that are placed upon them to keep up-to-date with all reporting requirements. Some IRS forms and instructions have only recently been released (as late as October 15th). If you need a tax organizer, contact me, and I will furnish one to you once I get my hands on some. These organizers are great tools to bring to your tax advisor for the accurate preparation of your return. I would like to take this opportunity now to bring some special items to your attention. THE AFFORDABLE CARE ACT: All Americans will be affected in some manner by the Affordable Care Act of 2010 (some call it Obamacare). There are five new tax forms which were released for 2014 as a result of this act. If you receive a Form 1095 from any issuer or agency, your tax preparer must have all copies to prepare your return. If you don’t receive a 1095, you will be asked a number of additional questions regarding your minimum essential coverage in order to avoid any penalties for failure to have health insurance. Due to these new forms, I am expecting that just about everyone in the tax preparation industry will be raising their fees, courtesy of the Affordable Care Act, due to the additional time that is needed in order to get things done right. As you probably know, beginning in 2014, taxpayers were required to obtain health insurance, or risk facing a tax penalty. In some situations, the penalty will increase in 2015. Many individuals are unaware that their refund could be reduced, delayed, or even vanish completely. The millions of taxpayers who purchased health insurance on the Health Insurance Marketplace may be in for yet another unpleasant surprise if they received an Advanced Premium Tax Credit, but then had a life-changing event (such as a raise, new job, got married, got divorced, etc.), which could have made them ineligible for the credit. It is important that all changes in circumstances be reported to the Marketplace immediately as they occur so you get the proper type and amount of premium assistance. Things to think about NOW: ACCELERATE & DEFER Deferring tax is a cornerstone of tax planning. This means accelerating deductions into the current year, and deferring income into next year. This allows you to reduce taxes in the current year at a higher rate, if your overall tax rate is expected to be lower next year. Alternatively, if your business is thriving, and you expect to be in a significantly higher tax bracket in 2015, take the exact opposite approach by accelerating income into this year and postponing deductions until 2015. When doing this, however, you must be mindful that accelerating too much income in either year could possibly cause you to be subject to the 3.8 net investment income tax and the .9% Medicare tax. Working with your tax professional is the wisest course of action. The 2015 tax rate brackets are scheduled to be about the same as this years, with modest bumps for inflation. * To accelerate income into this year, think about harvesting some gains from your investment portfolio: sell stocks or other assets with taxable gains. If you own a traditional or SEP IRA, convert it into a Roth IRA and recognize the conversion income this year. Take an IRA distribution this year rather than next. If you’re self-employed, get your customers to pay you this year rather than next. * To defer income into 2015, consider asking your employer to defer your bonus. Also, you can bill for your consulting or self-employment income later in the year so your customers don’t pay you until 2015. If you are considering selling assets at a gain, postpone the sale until 2015. Delay the exercise of any stock options you might have. If you are selling property, consider an installment sale. If you are within the income requirements, establish an IRA. * To accelerate your deductions into this year, consider making your January mortgage payment early. Make up any shortfall for state taxes in December rather than waiting for your tax return to be due. Make any large charitable contributions now. Sell some or all of your loss stocks. Make the maximum allowable contribution to your health savings account. Prepay your next real estate tax bill early. * To defer deductions into 2015, think about postponing year-end charitable contributions, property tax payments and medical/dental expenses, to the extent you might get a deduction next year. Postpone sales of loss-generating properties. DEDUCTIONS IN GENERAL: There are two types of deductions. One of these types is an “above-the-line” deduction, which is valuable because you deduct it before you calculate your Adjusted Gross Income, and it is allowed in full. Common above-the-line deductions include traditional IRA and health savings account (HSA) contributions, moving expenses, the tuition & fees deduction, the student loan interest deduction (up to $2500), the educator expense deduction ($250), self-employed health insurance costs and alimony payments. The other type of deduction is an “itemized” deduction. Taxpayers can take either a ‘standard deduction’ or ‘itemized deductions’ – but not both. Some itemized deductions need to exceed a certain percentage of your Adjusted Gross Income. Common itemized deductions are: Healthcare Expenses: Last year’s tax bill reduced your deduction for medical costs, including health insurance for 2014. We will see very few deductions available for medical costs now--unless you have substantial bills. The amount of your medical expenses in most cases must now be more than 10% of your income (it’s still 7.5 percent for taxpayers age 65 and older) before any medical deductions are taken, so weigh carefully whether to go through the trouble of summarizing these costs. Consider scheduling your costly non-urgent medical procedures into a single year. This may mean moving up a procedure into this year or postponing it until next year, when you’ll have more medical expenses. Charity: All donations of any amount must have a receipt! Any individual contribution over $250 must also have an acknowledgement letter from the charity, and the letter must be dated by the date your return is filed. The letter should show the date and amount of the contribution over $250, and should also state that no goods or services were received in return for the contribution. Mortgage Interest: You must obtain Form 1098 if you pay mortgage interest. Additionally you should obtain refinancing closing statements and bring them with you into your tax prep appointment. Real Estate Taxes: You could accelerate your deductions by prepaying your real estate taxes early in December. However, if you find yourself stuck in the Alternative Minimum Tax (AMT), this will not help you at the federal level. State and Local Sales Tax: When you itemize deductions, you can elect to deduct state and local sales tax (instead of state income tax.) This is valuable if you live in a state without an income tax, but can also provide a bigger deduction in those states if you made big purchases subject to sales tax (like a car, boat, motor home or all three). The IRS has a table allowing you to claim a standard sales tax deduction so you don’t have to save all your receipts during the year. This table is based on your income, family size and the local sales tax rate, and you can add the tax from large purchases on top of the standard amount. Consider making any planned large purchases before the end of the year. State Income Tax: If you are self-employed and take an income tax deduction, and need to accelerate deductions into the current year, consider paying the balance of your quarterly estimated taxes before the end of the year. 2% Miscellaneous Deductions: To exceed the 2% AGI floor for other miscellaneous expenses, consider paying in one year the legal or professional fees that you would normally spread over two years. Or bunch your unreimbursed business expenses such as travel and vehicle costs. OTHER ITEMS TO CONSIDER BEFORE YEAR-END Alternative Minimum Tax: If you are subject to the alternative minimum tax (AMT), your deductions may be limited. Thus, if you anticipate that you will be subject to the AMT, you’ll need to consider the timing of deductible expenses that may be limited under the AMT. Understand the New Home Office Deduction Safe Harbor: You can deduct some of the cost of your home if you use your home as your principal place of business, use it to meet clients and customers in the normal course of business, use an area to keep a supply of inventory, or your office is a separate structure not attached to your home. If you are not self-employed, the use of your home office MUST be “for the benefit of” your EMPLOYER. The IRS has a new safe harbor that allows you to deduct up to $5 per square foot of home office space up to a maximum of $1,500 per year. Make Up a Tax Shortfall with Increased Withholding: Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall through increased withholding on your salary or bonuses. You can complete a new Form W-4 and give it to your employer at any time. (Enter the added amount you want withheld from each paycheck until the end of the year on Line 6.) Retirement Account Tax Savings: It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement account (IRA) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. If your financial situation allows it, make sure you contribute the maximum amounts that you are allowed by law. Consider a Roth IRA Rollover (Conversion): It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion now in exchange for no taxes in the future (if withdrawals are made properly). If you’ve already converted your account this year, re-examine the rollover. If the value of the account went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax. You will continue to hear from lots of experts on conversions. While there are a number of advantages to them, there are an equal number of disadvantages that can carry some major tax consequences. So please do not convert your accounts without first setting an appointment with your tax advisor to discuss both the positives and negatives. All conversions for 2014 must be completed by December 31, 2014. Stocks: If you have lost money on stocks, and in your opinion they’re never coming back, sell them and take the loss. Then you can possibly look at some of your gains and take them before those stocks perhaps become stinkers too. Losses can be deducted against gains, and any excess losses can be deducted against other income up to $3,000/year with the remainder carried forward. Flexible Spending Accounts (FSAs): If you have a health flexible spending account with a balance, you might want to spend it before year-end (unless your employer allows you to go until March 16, 2015). Gift Tax Exclusions: This is important if you have a substantial estate, but very few Americans need to worry about this, or about Federal estate taxes, because of the changes in the estate tax limit. Effective 1/1/13, the amount you can give to any one person can be up to $14,000, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. If you combine gifts with a spouse, you can give up to $28,000 per person, per year. For example, a couple with three grown children who are married could give each couple $56,000 each and remove a total of $168,000 from an estate, gift tax free, in a single year. Even more could be given tax free if you have grandchildren! Foreign Accounts: If you have read any news in the last year, you know that the IRS is looking closely for offshore accounts. If you have an account, a retirement account, or business interest with a value over $10,000 in ANY foreign country, or a foreign business ownership (not through a mutual fund), please let your preparer know as some special rules will apply to you. There are substantial penalties for failure to disclose these items. Children/Student Tax Returns: Under no circumstances should you allow your dependent children or college students to file their own returns. I say this now exclusively due to the Affordable Care Act. Allowing your child to file their own return, particularly if he/she was more than a half-time student, could cost the child and parent literally thousands of dollars in Health Care penalties and/or credits. NIIT (The 3.8% Surtax): The net investment income tax is a 3.8% tax on investment income, and is most superbly defined and explained in the following document on-line: ustrust/publish/content/application/pdf/GWMOL/AR9F038C.pdf There’s a lot to it, and I didn’t want to cover it because this publication is so exceptionally well written. If you have any questions on the NIIT, read the publication, and feel free to ask me. The 2% Club: If you are in what the press is now calling the “2% Club,” be aware that the rest of America will soon be joining you. When the surtaxes on this group of Americans were passed, Congress purposefully did not adjust the thresholds for inflation, and in 6 years, over 50% of all Americans will pay these surtaxes based on estimated inflation rates. Begin planning now whether you are a 2% club member or not by (in this order) maximizing your 401(k) contributions; utilizing employer-sponsored cafeteria plans to their fullest limit; investigating and using employer-sponsored fringe benefits, such as child care and education reimbursements; turn in job expenses for reimbursement; and consider your marital status as your income increases because of the marital penalty built into these surtaxes. Partnerships, SCorps (known as pass-through entities): Your share of the enterprise’s net income will be reported on your Form 1040 and taxed at your personal rates. If you receive any Form 1099-K, please be sure to bring it with you to your tax meeting. They must be reported and can have a direct impact on your return. Unfortunately, many people don’t get these forms until late in the filing season. Owners of Rental Property: If you own a rental property, you will need, for each property separately, the physical location, the type of property (single-family, duplex, etc), and a record, by property, of the number of days rented and the number of days used for personal purposes. You will also need receipts for all expenses relating to the property, and the type of expense. This is very important because there are new IRS rules for ‘repair’ vs. ‘improvement’, and your tax preparer will need to decipher which rules to go by. Vacation Home Rentals: If you have a vacation home that was rented out during the year, again, you will need to determine the number of days it was rented and the number of days it was used for personal use. This is an important determination of whether to apply the vacation home rental rules or the qualifying second residence rules. Sole Proprietorship/Small Businesses: If you are self-employed, the first thing you’ll need to know is how much you paid for health insurance. I realize that, of all taxpayers, it is the small business taxpayer that finds it the most burdensome of times during tax season. I fully understand this burden. If you need help in organizing or keeping track of your income and expenses, contact me. Unfortunately, it is you who are the most likely to be audited, and your need for being able to prove your income and expenses is critical. You should be paying quarterly estimated taxes on your income in order to avoid late payment penalties. Juggling your year-end income and deductions can be fairly simple if you use the cash method of accounting. You can accelerate your deductions and defer your income items too, but please - be careful: • Before year-end, charge recurring expenses that you would otherwise pay early next year on credit cards. You can claim 2014 deductions, even though the credit card bills won’t be paid until next year. (BUT, this doesn’t apply to store revolving charge accounts. For example, you cannot claim a business expense charged to your retail store account until you actually pay the bill.) • Pay expenses with checks and mail them a few days before the year-end. The tax rules say you can deduct expenses in the year you mail the check, even though they won’t be cashed or deposited until early next year. For big ticket expenses, send the checks via registered or certified mail to prove they were mailed this year. Again, there was a very special IRS ruling this year, and you MUST have the available funds to cover the amount of checks you write and mail … at the time you write and mail. • You can also prepay some expenses for next year. But then again, there are more rules as to when the expense is ‘effectively connected’ within the tax year -- so ask your tax advisor. You wouldn’t want to lose the deduction altogether. • You might ship (and invoice) products before year-end those that are scheduled for delivery in early January, and hold off on sending checks to vendors until after January 1. I suggest playing with the above only if you know exactly what you’re doing. If not, you should be working with your tax advisor and getting the correct advice at all times. There are so many rules to go by, and there are so many mistakes to be made…… just sayin.’ The IRS has also issued new rules on the capitalization and expensing of tangible property used in a trade or business. If your small business has shown losses for the past several years, there is yet another danger that the IRS will consider your business a ‘hobby’ and they will disallow all deductions in excess of revenue. TAX PLANNING & FINANCIAL CHECK-UP: The end of the year is always a good time to assess your current financial situation and plan for the future. You should think about cash flow, health care, retirement, investment and estate planning. If you’ve had any major changes, or are expecting changes (by the year-end or in the near future), you should schedule that meeting with your tax advisor. Check your wills, powers of attorney and health care proxies, and schedule that meeting with your lawyer. Use the open enrollment period now to reconsider employer-sponsored programs that could reduce next year’s taxable income. There are lots of changes, extensions and deletions that need to be considered while preparing your return. You should try to have your tax information into your preparer at least 2 weeks in advance of your meeting, and especially no later than mid-March, in order to accurately complete and timely file your return, while keeping your bill to a minimum. The exemption, earned income and child tax credit rules have changed multiple times over the past decade. Hundreds of pages have been added to the Tax Code. If your preparer is not ‘up to snuff’ – then it’s TIME TO GET A NEW PREPARER. (I really hate to say this, but you usually get what you pay for.) There are just too many ‘mom & pop’ and ‘local corner’ tax shops and ‘friends’ that do tax preparation -- and yes, some of them are very established CPAs who received their degrees in 1985, but may not have updated their TAX preparation expertise in the last 20 years, because it’s not required of them. The error rates are extremely high and, although current education is an absolute necessity among us, you must be aware it’s not mandatory. When you sign a tax return….it’s you who is held responsible for the costly errors that could be on it. So be prepared to pay for an educated, up-to-date tax preparer. Sincerely, Cathi Stockmal
Posted on: Sat, 01 Nov 2014 10:32:00 +0000
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