By taking certain steps now, before 2014 draws to a close, individuals may be able to reduce the size of their tax bill otherwise due when they file their returns next year. We will discuss some of the traditional year-end planning techniques, how events in 2015 may impact year-end planning, and more, including the Affordable Care Act, which impacts almost everyone in one way or another.
Tax Extenders Add Complexity
There will likely be an extension of tax extenders, probably for two years. That means the extension will be retroactive to January 1, 2014 because many of the extenders expired after December 31, 2013. For planning purposes, individuals should consider their tax strategies under one scenario that includes extension of the extenders and another that does not. The list of expired tax extenders is long. Among the more popular are the state and local general sales tax deduction, the higher education tuition deduction, the teachers’ classroom expense deduction, the mortgage insurance premium deduction, and direct IRA distributions to charity. Lawmakers are currently working on the bill to retroactively pass the provisions.
New Considerations from the Affordable Care Act
As of January 1, 2014, the Affordable Care Act requires all individuals to carry health insurance or make a shared responsibility payment, unless exempt. For many, employer-provided health insurance will satisfy the individual mandate. Others will satisfy the individual mandate if they are covered by Medicare or Medicaid. Individuals who are not exempt will need to make a shared responsibility payment when they file their 2014 returns in 2015.
Generally the shared responsibility payment amount is either a percentage of the individual’s income or a flat dollar amount, whichever is greater. The amount owed is 1/12th of the annual payment for each month that a person or the person’s dependents are not covered and are not exempt. For 2014, the payment amount is the greater of:
- 1% of the person’s household income that is above the tax return threshold for their filing status; or
- A flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.
The lack of health insurance does not automatically mean an individual must make a shared responsibility payment. The types of exemptions are broad. For example, an individual may have no affordable coverage options because the minimum amount he or she must pay for the annual premiums is more than 8% of household income. An individual also may have a hardship that prevents him or her from obtaining coverage.
Traditional Tax Planning
Traditional year-end tax planning techniques remain very important for 2014. In considering steps to take in year-end planning, please keep in mind that the goal is to minimize taxes overall for 2014 and 2015 which may mean taking into account expectations for next year as well. In considering income deferral and deduction/credit acceleration techniques, it is important to maximize each of the lower tax brackets in both 2014 and 2015. Here is a list of some actions to consider before year-end if they make economic sense for your particular situation.
If you expect your income in 2015 to be the same as or lower than your income in 2014, please consider the following income deferral and deduction acceleration techniques: 1) Sell appreciated assets in 2015 rather than 2014. 2) Delay Roth conversions to 2015. 3) Minimize retirement distributions. 4) Execute installment sales or like-kind exchange transactions rather than recognizing the gain and paying tax upon the sale. 5) Minimize the effect of AGI limitations on deductions/credits. 6) Maximize net investment interest deductions. 7) Match passive activity income and losses.
Additional Strategies to Consider
- If you expect to be in the 10% or 15% tax bracket in 2014 and have long-term capital gains or dividend income, you may be able to take advantage of a 0% tax rate on both of those types of income. To take advantage of this provision, a single taxpayer must have taxable income of less than $36,900, and married couples must have taxable income of less than $73,800, including the capital gains.
- Realize losses on securities while substantially preserving your investment position. For taxpayers to whom the 20% long-term capital gains rate and/or the 3.8% Medicare surtax may apply, this may help to reduce the effect of those provisions. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later. Please be sure not to sell solely for tax reasons, but rather with your overall investment plan in mind.
- Take required minimum distributions (RMD’s) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) if you have reached age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. If you turned 70 ½ in 2014, there are special rules regarding the timing of your distribution.
- Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This may enable you to claim larger deductions, credits, and other tax breaks for 2014. Postponing income may be desirable for taxpayers who anticipate being in the same or lower tax bracket next year.
- It may be advantageous to arrange with your employer to defer a bonus until 2015.
- If you are self-employed and haven’t done so, consider setting up a self-employed retirement plan.
- If you own an interest in a partnership or S-corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
- Consider using a credit card to prepay expenses that generate deductions for this year.
- Minimize/maximize retirement distributions/contributions.
- Bunch itemized deductions into 2014 and take the standard deduction in 2015 or reverse steps and take the standard deduction in 2014.
- If you expect to owe state and local income tax next year, increase withholding or pay estimated tax payments before year-end to pull the deduction into 2014, if doing so won’t create an AMT problem.
- Accelerate personal big ticket purchases (such as the purchase of a vehicle or boat) into 2014 for a deduction of sales taxes. This deduction expired on December 31, 2013, but is expected to be extended by Congress.
- Consider extending your subscriptions to professional journals, paying professional dues, enrolling in and paying for job-related courses, purchasing a new vehicle when used for business purposes; etc., to bunch into 2014 if doing so will help them to exceed the floor amounts based on income.
- Donate appreciated stock. If you’ve owned the shares over a year, you can deduct the full value and not pay tax on the appreciation.
- If you’re thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
- Taxpayers with potential NII (Net Investment Income) tax liability should consider keeping income below the $25,000/$125,000/$200,000 thresholds if possible by spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions.
- If you are facing a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding.
- Keep in mind the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014.
- Make annual exclusion gifts before year-end to save both estate and gift taxes. In 2014, you can give $14,000 in cash or property to any one individual free of gift tax and this applies to an unlimited number of individuals. However, 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. Also, amounts paid directly to educational institutions or health care providers on behalf of others are not considered gifts.
These are just a few of many strategies. Please call our office at (239) 433-5554 if you have any questions or would like to schedule an appointment to discuss your specific year-end tax planning needs.