Tax planning for year-end 2014 should use both traditional year-end strategies as well as those that react to situations unique to this year. Particularly important at year-end 2014 is the impact of certain tax benefits that ended with 2013 and that may not be retroactively revived; and attention to new opportunities and pitfalls created during the past year through court cases and IRS rulings.
The traditional year-end strategy of income shifting applies to year-end 2014 but with an extra twist. Under traditional strategy, you time your income and deductions so that your taxable income is about even for 2014 and 2015 so your tax bracket does not spike in either 2014 or 2015. If you anticipate a higher tax bracket for 2015, you may want to accelerate income into 2014 and defer deductions into 2015. If you anticipate a leaner 2015, income might be delayed through deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings.
When Social Security recipient’s modified adjusted gross income (MAGI) plus 50% of Social Security benefits exceed certain base amounts, the benefits can be taxable. The MAGI thresholds are $25,000 for singles and $32,000 for marrieds filing jointly. If your income is close to these thresholds you should consider deferring income, if possible, to avoid tax on the benefits.
If you initiated a Roth conversion earlier in 2014 and that Roth account has declined in value since then, you should consider a “Roth reconversion.” Reconverting your Roth IRA back to a traditional IRA before year-end will allow you to avoid paying income tax on an account balance at its higher value.
Finally, if you have not yet made a Roth conversion, doing so at year-end 2014 might be an opportunity worth serious consideration. Variables include your present income tax bracket, how close you are to retirement, and your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later.
Many individuals and their dependents without qualifying health insurance will owe a tax in 2014. Several exceptions apply, particularly for lower income families.
The exemption amount for couples increased to $82,100 and $52,800 for singles and heads of household. The phase-out zones for the exemptions start at $156,500 for couples and $117,300 for singles and household heads.
Time the recognition of capital gains and losses at year-end to minimize your net capital gains tax and maximize deductible capital losses. Many investors still have excess capital losses from past stock market declines that they may now “carry over” to offset capital gains that would otherwise be taxable.
For calendar year 2014, the employee-share of OASDI tax is 6.2 percent up to the Social Security wage base of $117,000 and the Medicare tax is 1.45% with an unlimited wage base.
Also, beginning on January 1, 2013 there is a 0.9% Medicare surtax on earned income. The surtax applies to wages and self-employment income. It applies to single filers and heads of household when total earnings exceed $200,000 and $250,000 for married filing jointly taxpayers. For earnings over the thresh-hold, the effective Medicare tax will be 3.8%, the usual 2.9% tax rate, plus an extra 0.9%. The surtax only applies to the employee’s share of tax, employers do not owe the tax.
Marriage, divorce, the birth of a child, death, a change in job, or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. Your marital status is determined on December 31. If you are married on December 31, you are considered married the entire year. If you were divorced on December 31, you will be considered single for the entire year.
Tax benefits that expired on December 31, 2013 include but are not limited to:
the state and local sales tax deduction,
exclusion of up to $2 million of forgiven debt on a debtor’s primary home,
the ability of those 70 ½ and older to make distributions of up to $100,000 annually from their IRAs to a charity
Taxpayers in many states experienced natural disasters in 2014. A casualty loss can result from the damage, destruction or loss to your property from any sudden, unexpected or unusual event, such as a hurricane, tornado, earthquake, wildfire, or flood. Casualty losses are generally deductible in the year the casualty occurred, less ten percent of your adjusted gross income and a $100 per casualty deductible.
However, if you have a casualty loss from a federally declared disaster, you can elect to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. The election gives taxpayers the opportunity to maximize their tax savings in the year in which the savings will be greatest.
If you have significant income not subject to withholding in 2014 you should increase your payroll withholding for the remainder of the year to ensure that it covers the required estimated payments in order to avoid underpayment penalties.
The current estate tax is set at a maximum 40 percent rate and a $5.34 million exemption amount, indexed for inflation. Lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan. The annual gift tax exclusion per donee on which no gift tax is due is $14,000 for 2014 with $28,000 allowed to each donee by married couples. Making a gift at year-end 2014 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.