Your end of year tax planning
Soon we will close the door on your opportunity to plan for your 2014 tax situation.
In this message I provide tax planning tips to help with your financial goals. Unfortunately, we don’t know whether Congress and the President will extend some of the key tax breaks in the IRS Code for yet another year.
You will just have to decide how to respond to this uncomfortable situation. If you have relied in the past on large Section 179 or bonus tax depreciation deductions to reduce your taxes, those might not be available for 2014 without further law changes. However, you might decide to go ahead and buy the equipment and vehicles that you need before the end of 2014, then at least you will capture the traditional depreciation deductions if the higher Section 179 or bonus deductions are not extended.
A key tax strategy for high income folks is to try to reduce adjusted gross income (AGI). Higher tax rates apply at higher income levels and deductions, exemptions and credits phase out. Reducing AGI is not easy, especially in just a few days or in even a single year. Nevertheless, with good planning much can be done over time. For example, some of our clients successfully become real estate professionals and reduce their AGI and achieve high passive income streams.
Please keep in mind several things: Successful tax planning usually requires at least one of three things: (1) change the applicable taxpayer to reduce tax rates, (2) change the year the income is taxable or expenses are deductible, or (3) change the type of income received. If you pay a significant amount of taxes and you are on a salary, take advantage of all reasonable opportunities to defer recognition of income, such as participation in pension plans and deferred compensation arrangements.
During 2015, a major goal for our practice is to have more time to spend with you. I want to do “check-ups” of your tax and financial health at least twice a year. I look forward to engaging with you in personal tax and financial planning sessions. I have added resources to our firm to be able to achieve those goals. Of course, I will need your participation to provide those enhanced services. Please feel free to call me at 801-783-3457 at any time.
Another goal is to reduce the potential for you to experience tax penalties and interest. A key to doing that is maintaining your financial records continuously up-to-date. We now have more accounting and payroll resources to assist you in those efforts.
The following tips are not complete nor customized to your personal situation. However, I think they constitute a good checklist of items for you to consider before the end of this year. Implementing the strategies may require more discussion and analysis. Please keep in mind that good tax planning is an individual exercise.
With much appreciation,
Bruce Warner, CPA
Individual Tax Planning Tips
- If you have long-term loss carryovers from prior years, you can deduct up to $3,000 of those losses each year and carry them forward until utilized.
- Analyze your portfolio and look for a tax harvest. Review your 2014 sources of taxable gains and income, and seek to generate losses to offset against those gains. You might consider selling investments with deferred losses, or sell stock that would produce a loss if you have sold other investments at a gain.
- Review whether you might have an Alternative Minimum Tax liability in 2014. This is especially likely if you live in a high tax state or if you will have a high taxable income. If you might be subject to the AMT, do not pre-pay your income or property taxes this year.
- You might seek to defer taxable income such as by delaying billing customers or looking for business expenses that can be paid before the end of the year. However, remember that prepaying items like insurance for several years in the future does not accelerate deductions even under the cash method of accounting.
- Delay purchasing new mutual fund shares until after the first of next year so you do not end up just buying taxable gains.
- Consider gifting funds for your own or your children’s education into a Section 529 education plan. Earnings on these assets are not taxable when withdrawn for education purposes, and you might get a state tax credit. Grandparents can contribute large amounts (up $70,000 per donor to each beneficiary) into these plans without gift tax consequences. Check out the specifics with the 529 Plan in your state.
- Consider having your child claim the American Opportunity Credit if they are too old to be claimed as dependents on your own tax return. That way you can achieve a credit even if your own taxable income would make you ineligible for the credit.
- Seek to find other ways to finance college education other than student loans. Such loans are not cancellable in bankruptcy.
Charitable Contributions Tips
- Gift appreciated stock to your favorite charity to avoid paying capital gains tax and be able to deduct the fair value of the stock at the date of the gift.
- High asset individuals have many options for meeting their charitable goals, such as a donor advised fund. See additional information that is available from us on request.
- Be sure to get a contemporaneous receipt from your favorite charity or you risk disallowance of large donations in an IRS audit.
- Consider donating to a conservation easement program. Significant charitable donations do not trigger the AMT and can be carried forward for five years if they exceed annual limits that are based on your AGI.
- Take a photo of those non-cash donation items to make it easier for you to value them and to prove the donations to the IRS. Ask us for a guide to valuing such gifts.
- Don’t forget to keep track of charitable mileage. You can deduct the typically higher actual cost of gasoline, as compared to the 14 cent IRS mileage rate.
- Consider making charitable contributions via credit card before year end to achieve a 2014 deduction.
- To be able to deduct your S corporation medical insurance this year you will need to add the cost of the insurance to your Box 1 wages on your W-2 and also include the wages as taxable income for medicare and FICA purposes due to the new health care law. However, we understand that there is a “workaround” available to you to get around the new Medicare and FICA taxes. See us for a referral to the “workaround” program.
- You could be assessed a fine of $100 per day ($36,500 per year) if you reimburse your employees for medical premiums that they pay without having your own Company health plan, as many small employers have done. We also have a suggested “workaround” for this problem if it applies to you.
- Consider enrolling in a Health Savings Account and making a contribution before the end of 2014 to capture future tax benefits of being able to deduct non-covered costs related to a High Deductible Health Plan.
- Be sure you and your dependents are continuously enrolled in health insurance to avoid the health law penalties for not having coverage. We will have to collect more data from you this year as a result of the new law, including monthly coverage verification for you and your dependents.
Other Tax Reducing Tips
- Make an extra withholding tax payment or two before the end of the year if you might otherwise be subject to a late or under-payment penalty. Make sure your entire 2014 tax liability is paid by 4-15-2015.
- Make estimated tax payments by January 15th for the same reason.
- Discuss major life events with your advisors, such as a pending divorce or marriage.
- Defer income and accelerate deductions, but be wary of the AMT if those deductions are tax preference items. Remember that many tax deduction and credit limitations are based on how high your AGI is. Read the article (under Resources, Helpful Tax Documents and the 1040 Tab) on bearlaketax.com for more information about the AMT.
- Group or “bunch” deductions that have limitations based on AGI into certain tax years, such as your optional medical procedure costs, or those pesky deductions that are limited by the 2% of AGI threshold.
- Make your house energy-efficient to capture a credit for up to 30% of the costs.
- Consider establishing your main residence in a low-tax state if you live in a state with high tax rates.
- Consider building a new home after living there for at least two years to take advantage of the exclusion of gains on sales of homes.
Retirement Planning Tips
- Consider funding a traditional IRA before 4-15-15. Older taxpayers should consider making an extra catch-up contributions. The applicable limits are $5,500 and $6,500.
- SEP-IRAs are great vehicles for retirement contributions by business owners because you can contribute up to 25% of your salary (or Schedule C earnings, as adjusted) and make the contribution up to the extended due date of your 2014 tax return. Consider what your salary should be for 2014 in light of reasonable compensation rules, impacts on social security benefits and taxes, your ability to make a pension contribution, and the additional Medicare tax on high salaries.
- Solo 401-K plans are great options if you meet the eligibility criteria by employing just yourself and spouse. These plans must be established before the end of 2014, and have some administrative costs, but you can borrow money from the plan and make Roth IRA contributions.
- Do you have a high income and are older? Look carefully at establishing a defined benefit pension plan to reduce your AGI and prepare for retirement.
- Consider a Roth IRA Conversion by converting all or part of a regular IRA to a Roth IRA, especially if you will have a low AGI this year and have money to pay the taxes that will be due from sources outside of your retirement plans. Remember to direct the conversion of your funds into a new Roth account before the end of 2014. If you change your mind later, you can re-characterize some or all of the funds back into the regular IRA before the extended due date of your tax return.
- Contribute to a Roth IRA account if your income is $114,000 or less if single or $181,000 or less if married and you file jointly. If you pay your children in your business, making Roth contributions for them is a great path to start them on the road to wealth! Remember and take advantage of the Rule of 72: Investment Funds double in the amount of time defined by 72 divided by the rate of return (example 72 divided by 10 percent means that an investment earning 10 percent will double in 7.2 years). If you make regular contributions this rule and your regular contributions can add up to a lot of money in a hurry.
- Consider the optimal time to begin taking social security if you are old enough. Be sure to apply for Medicare 3 months before your 65th More people should likely defer taking social security until age 70, but your spouse may want to claim benefits earlier.
- If you are interested in real estate, talk with us about the numerous tax and wealth-building advantages associated with real estate investments. As an alternative to traditional long-term rental properties, consider the tax benefits of vacation rental properties.
- Consider in your retirement plan the value of your business and of your home. Be careful if you are interested in taking a reverse mortgage. Consider how you should transfer these assets to the next generation with an estate planning attorney.
- Consider buying a vehicle weighing over 6,000 lbs. in weight, such as a SUV, to capture up to $25,000 of depreciation this year. Consider this only if your business use will exceed 50%.
- Establish a formal capitalization policy of expensing capital items below $5,001 per item if you have an audited financial statement or below $501 per item if your financials are not audited. This should be formalized in your records prior to the end of the year.
- Consider whether you should increase your basis in your partnership or S corporation before year-end by personally loaning the business money (if an S corporation) or making a capital contribution. If you have had a loss, this may allow you to take all of the loss on your 2014 tax returns since you must have basis in the business to be able to take losses.
- Consider establishing a new LLC- S corporation or C corporation before year-end to help reduce your tax rates. Time is very short now to do this. Please let us know immediately if you would like to discuss this.
- Take a physical inventory count at year end, and expense items that are obsolete or damaged and true-up your inventory value.
- Purchase non-inventory supplies and complete needed repairs and maintenance before year-end.
- Consider making money next year through a new business or investment strategy that will allow for multiple streams of income, additional control over the timing of income and deductions and opportunities to legitimately deduct what might otherwise be personal costs.
- Be sure to regularly and exclusively use your home office. Take pictures of how you use the office as part of your documentation. Consider reconfiguring the office to add more business space, or add assets to the office before the end of the year. Consider adding a detached office and garage structure to your home.
- Discuss with us a strategy that you can live with to keep track of those pesky personal and business miles. Consider using the actual cost method for new vehicles. See bearlaketax.com.
- Have your annual corporate meeting as a retreat to both enjoy yourself, to refocus your business plan and to comply with corporate annual meeting requirements.
- Stop intermingling personal and business funds as a goal for implementation fully in 2015.
- Become an independent contractor instead of an employee (if feasible) in 2015.
Expired Tax Benefits –
Will they be reauthorized in Late 2014/Early 2015??? Stay Tuned In…
- Tax free distributions for those age 70 ½ or older from individual retirement plans
- Option to deduct state and local sales taxes
- Above the line deduction for qualified higher education expenses
- Deduction for mortgage insurance premiums
- Research and development credit
- Increased limitation of expensing up to $500,000 of Section 179 property. If not extended, the limit is only $25,000 this year
- 50% bonus depreciation
- The $250 out of pocket expense deduction for educators
Tips to Help You Avoid IRS Interest and Penalties
- File your returns and pay your taxes on time. Extensions do not result in permission to pay after the normal due dates. Penalties and interest for filing and paying late are heavy. The late filing penalty is 4.5% per month of the tax owed. The late-payment penalty is 0.5% a month of the tax due. The maximum late filing penalty is 22.5%, and is 25% for late payments. Additional penalties apply per owner per month or partial month to late filed partnership and S corporation returns.
- Work with us to obtain updated estimates of your tax liability. Remember those estimates can’t be provided without good, updated data from you. Consider last years’ returns and provide information on changes.
- Keep up to date on your bookkeeping so you know how your business is doing.
- Pay estimated taxes on your non-salary income.
- Review and update form W-4 (your withholding allowances) with your employer at least once per year.
- If you have a C corporation that is making money, be sure to pay estimated income taxes each quarter on its income.