Year End Tax Planning for Individuals
Dear Clients and Friends:
As another year nears its end, we are reminded that it is time to contemplate year-end individual tax planning strategies. Projecting your current year tax liability allows us to seek opportunities to reduce that burden. Planning for that liability also allows us to identify your cash flow needs well in advance of April 2015.
Year-end tax planning may involve any number of matters: being aware of changes in the tax laws, taking advantage of expiring tax provisions, and deferring or accelerating income or deductions depending upon your specific situation. A significant swing in your income or expenses from year to year may make such strategies worth considering.
The following includes information on tax law changes that took effect this year, as well as planning opportunities that may make sense for you.
Traditional Tax Planning
Thoughtful planning will consider tax savings within the context of your entire financial picture. The following are some of the actions we would review before year end to see if they make sense in your situation.
Accelerate Income into 2014
It may be beneficial to accelerate income into 2014, especially if your 2015 income is projected to be significantly greater. Options for accelerating income include:
- realize gains from selling stocks or other assets this year;
- take IRA distributions (non-RMD) this year rather than next year;
- convert a Traditional IRA or SEP IRA into a Roth IRA and recognize the conversion income this year;
- if you own a business that uses cash-basis accounting, encourage customers to pay your accounts receivable before year end; and
- finalize legal matters or insurance claims that will generate taxable income this year.
Defer Income into 2015
Alternatively, it may make sense to defer income into 2015 – in particular, if you think that your overall income will decrease considerably next year.
Income deferral options include:
- time the receipt of a year-end bonus in January 2015 rather than December 2014;
- postpone the sale of assets at a gain until 2015;
- harvest losses to offset gains already realized;
- delay the exercise of any stock options;
- if you intend to sell property, consider an installment sale to spread out the receipts over time;
- consider tax advantageous investment options;
- fund an IRA, if you are within certain income requirements; and
- maximize salary deferrals to a qualified retirement plan.
Defer Deductions into 2015
If you anticipate a significant increase in taxable income in 2015, you may want to consider deferring deductions into 2015:
- defer the payment of year-end charitable contributions, property tax payments, deductible state income taxes and medical expenses, to the extent you might get a deduction for such payments then; and
- delay the sale of any property that will produce a deductible loss.
Accelerate Deductions into 2014
If you expect your 2014 income to be higher than 2015 income, an acceleration of deductions into the current year may offset the higher income this year. For example:
- prepay property taxes in December;
- make your January mortgage payment in December;
- prepay any remaining 2014 state income tax liability rather than waiting until April (although AMT is an important factor in determining if prepaying that liability is beneficial – taxes are not deductible in computing AMT);
- bunch medical expenses into one year to help meet the 10% threshold;
- make any large charitable contributions in 2014, rather than 2015;
- sell property such as stocks at a loss; and
- fund a health savings account (HSA) to the extent allowable.
Alternative Minimum Tax
If you are subject to the alternative minimum tax (AMT), certain deductions are limited. Thus, if anticipated that you will be subject to the AMT, we need to consider the timing of expenses that are limited under AMT. If not beneficial this year, perhaps the expenditures should be deferred to 2015.
Net Investment Income Tax (NIIT)
The 3.8% NIIT has applied to taxpayers since 2013 who have net investment income in excess of certain thresholds, including $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. Net investment income includes income from a variety of sources such as interest, dividends, capital gains, royalties, most rental income, and business income in which the taxpayer’s participation is considered passive for tax purposes. To the extent possible, a taxpayer may want to consider spreading such income over a number of years. In addition, it may be possible to optimize the timing of certain investment income expenses that offset net investment income.
Expired Tax Provisions
The following temporary individual tax benefits, known as “tax extenders,” expired on December 31, 2013. These benefits are likely to be extended, probably for two years, as in the past. However, if Congress fails to act, some of the benefits that will not be available in 2014 are:
- Above-the-line deduction of up to $250 for certain expenses of elementary and secondary school teachers, including books, supplies, computers, and software
- Above-the-line deduction for qualified tuition and related expenses
- Credit for residential energy property
- Credit for two- or three-wheeled plug-in electric vehicles
- Exclusion from gross income for discharges of indebtedness on qualified principal residences
- Exclusion from gross income of qualified charitable distributions from individual retirement plans for individuals aged 70½ or older
- Itemized deduction for mortgage insurance premiums as qualified residence interest
- Itemized deduction for State and local general sales taxes in lieu of State and local income taxes
- Special 100 percent exclusion of gain on sale of qualified small business stock acquired after 09/27/2010 and before 01/01/2014
- Special 60 percent exclusion for gain on sale (attributable to periods through 12/31/2018) of qualified small business stock of an empowerment zone business (empowerment zone designations expire 12/31/13)
- Special rules for contributions of capital gain real property made for conservation purposes
In addition, the alternative motor vehicle credit for qualified fuel cell motor vehicles is set to expire December 31, 2014, so there may be little time to take advantage of this energy-driven benefit.
Maine Tax Issues
Following on the heels of a 2013 tax year law change, a Maine taxpayer who itemizes deductions will be limited to a cap of $27,500 (to be indexed for inflation). This limitation does not apply to medical and dental expenses included in the taxpayer’s itemized deductions from federal adjusted gross income, and beginning in 2015 it no longer will apply to charitable contributions.
If you are considering making additional charitable contributions before year end or will incur other deductible expenses that you may be able to defer payment of until 2015, please contact us to discuss.
It may make sense to continue to make such contributions or pay such expenses given your overall higher federal tax burden. We can help you determine the best approach to timing payment of such contributions and deductible expenses.
Shared Responsibility Payment
Beginning in 2014, some of the most far-reaching provisions of the Affordable Care Act became effective:
- the requirement to carry “minimum essential health coverage” for yourself and your dependents (known as the “individual mandate”);
- the ability to obtain coverage through an insurance exchange; and
- for qualified individuals, a special tax credit to help offset the cost of insurance.
If you fail to comply with the individual mandate to carry minimum essential health coverage, you are required to pay a penalty, called a “shared responsibility payment,” for each month of noncompliance. The rules stipulate that a person has minimum essential coverage for a month if the person is enrolled under a plan providing such coverage for at least one day during any calendar month.
Some individuals are exempt from the individual mandate, including, but not limited to:
- individuals covered by Medicaid and Medicare;
- incarcerated individuals;
- individuals not lawfully present in the United States;
- health care sharing ministry members;
- members of an Indian tribe;
- members of a religion conscientiously opposed to accepting benefits;
- individuals whose minimum cost for the annual premiums is more than eight percent of their household income;
- individuals who are without coverage for fewer than 90 days (although only one period of 90 days is allowed in a year); and
- individuals with employer-provided health insurance that satisfies minimum essential coverage and affordability requirements.
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:
- One percent 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.
If you qualified for the tax credit that helps to offset the cost of coverage, you may have taken an advance payment of the credit. If so, you must reconcile the amount you received up front with the actual credit computed when your 2014 tax return is prepared.
Many of life’s events may impact your tax situation. Marriage, divorce, birth or death in a family, lost or new jobs, and retirement all have important tax implications that should be analyzed in advance of the 2014 tax filing season.
The planning tips above represent just a few general considerations related to year-end planning for individuals. If you have any questions or you would like to discuss whether a projection of your 2014 tax liability is warranted before year-end, please call your BNN advisor at 1-800-244-7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachment) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.