Year-end Tax Planning for Individuals
Filed Under Blog, Blogroll, Income tax planning, Tax planning, Uncategorized · Tagged: 2014 tax, individual returns, reduce taxes, year-end
It’s that time of year again to begin taking the steps necessary to reduce taxes on your personal returns. Below we have put together some tips to ensure you make the most of this planning time.
Bunch your deductions: For example, bunching deductions on your personal income tax return can make sense for 2014. Bunching means you concentrate itemized deductions into the year offering the most tax benefit and claim the standard deduction in alternate years. Even if the current limitation on itemized deductions applies to you, bunching can be effective when combined with other tax planning such as reducing adjusted gross income.
One category of itemized deductions that lends itself to bunching is charitable contributions. In general, as long as you have written acknowledgment from a qualified charity, you can deduct donations in the year you write the check or put the charge on your credit card.
Instead of cash, donating appreciated assets before December 31 may be more tax advantageous. When you contribute property you have owned for more than a year, you can usually deduct the full fair market value.
For instance, say the value of the shares you own in a mutual fund has gone up since you bought into the fund. If you sell those shares and donate the proceeds to charity, you’ll have capital gain. But when you donate the shares to the charity, you can claim a deduction for the value on the date of your donation, garnering a benefit without the related income tax bill.
Other itemized deductions you can control in order to maximize tax savings include real estate taxes and state income taxes.
Check exposure to the AMT: Just remember to check your exposure to the alternative minimum tax and the 3.8% net investment income tax when deciding in which year to pay these tax bills. Why? Certain itemized deductions – such as taxes – are disallowed under the AMT rules, but can help reduce exposure to the net investment income tax.
What if you’re not planning to itemize? Taking a look at your deductions is still a useful exercise. One reason: The standard deduction is also disallowed under AMT rules, and you may benefit by itemizing even when your total itemized deductions are under the threshold.
The standard deduction for 2014 is $12,400 when you’re married filing jointly and $6,200 when you’re single.
Monitor adjusted gross income: Another tax planning strategy is to reduce adjusted gross income (AGI). One way to do this on your personal tax return is to maximize above-the-line deductions. These are expenses you can claim even if you don’t itemize. Above-the-line tax savers include such items as retirement plan contributions, student loan interest deduction, and the health savings account deduction.
Consider shifting income: A planning strategy to help reduce taxes on your personal returns is shifting income among family members.
An income-shifting technique is to make gifts of income-producing property to family members in lower tax brackets. (Be aware of the “kiddie tax.”) Though you can’t take a tax deduction for gifts, future income is taxed to the recipient, and may mitigate your exposure to the 3.8% net investment income tax.
Gifts of up to $14,000 per person ($28,000 when you’re married) made before year-end incur no income, gift, estate, or generation-skipping taxes.
Get a Head Start on Your 2014 Tax Planning
Filed Under Blog, Income tax planning, Tax planning, Uncategorized · Tagged: 2014 tax, automobile mileage log, document expenses, investment taxes, tax planning, Year end tax planning
Now is the time to get started on your 2014 tax planning!
Take advantage of the unique opportunity that the beginning of the year brings for your tax planning! By looking back on the still-fresh prior events, you can look forward to determine what you can replicate or improve.
Individualize your plan
If you are a business owner, you can benefit from retirement plan tax savings too! It is not too late to set up a Simplified Employee Pension (SEP) plan for last year. Business can make contributions for 2013 until the due date of your tax return, so you could have until October 15 of this year to save money on last year’s return. The maximum contribution to a SEP for 2013 is $51,000 ($52,000 for 2014).
Retirement plans play a large role in tax-saving strategies because contributions reduce your adjusted gross income (AGI). For 2014, AGI, or a modified version of AGI, will affect your eligibility for various tax and nontax benefits. You will want to manage your income to keep it within the range that’s most advantageous to you.
Manage your income
How do you manage your income? One way is by making sure that you can take deductions that reduce your gross income. An example is, if you started a business and you are expecting it will take time to show profits, understanding the hobby loss rules can save money, these rules affect the amount you can deduct.
You can claim losses in full and apply the excess against other income on your personal tax return, reducing your AGI as a self-employed business owner. When your activity is a hobby, for tax purposes you must claim the income but your deductions are limited.
To retain the tax advantages of business treatment, establish your profit-making intentions early. Set up a business plan, a bank account, and a recordkeeping system. For an additional tax deduction this year, set up your home office.
Net operating losses from an established business also present AGI planning opportunities. If your business expenses exceeded your business income in 2013, you have until you file your 2013 federal income tax return to decide whether to apply the loss to a prior year or carry it forward into 2014.
By carrying the loss back you can generate a refund, boosting current year cash flow. However, depending on the type of business, your expected 2014 income, and your tax bracket, it may make more sense to use the loss to offset your 2014 income.
Document your expenses
An additional way to preserve business tax deductions is to have a strategy for obtaining written documentation supporting your expenses. Anautomobile mileage log is a typical case in point. The rules for substantiating vehicle expenses require you to keep a record, generally one made at or near the time you incur the expense or use the vehicle for business purposes.
Other documentation to put in place now includes a written policy for taking advantage of new “repair regulations.” These rules let you currently deduct certain purchases of assets that might otherwise have to be capitalized.
One more reason to start managing your 2014 AGI early in the year is thenet investment income tax. This 3.8% surtax generally applies when you have investment income, including, capital gains, interest, and dividends, and your AGI exceeds $200,000 ($250,000 when you’re married filing jointly).
Income from passive activities, such as businesses in which you own shares but do not “materially participate,” is also subject to the tax. Since material participation is typically measured on the basis of the time you spend working in the business during the year, a smart beginning-of-the-year tax strategy is to create a schedule for increasing your hours.
If you own more than one business and there’s simply not enough time to materially participate in all of them no matter how early you start, you may be able to “group” the different activities. Grouping lets you combine your hours to meet the material participation rules. If you grouped activities in a prior year, special circumstances may give you the opportunity to make changes in 2014.
Consider taxes in setting your 2014 investment strategy
As you investigate opportunities for managing your portfolio in 2014, remember to pause and plan for the effect of tax laws. Here are some important rules to consider.
Capital gain tax rates
For 2014, the tax rate you’ll pay on gains from sales of assets dependson your taxable income and how long you’ve owned the investment. Gains on assets owned a year or less are taxed at the same rate as your ordinary income.
The rate for qualified dividends and sales of most assets you own longer than a year can vary.
The rate is 0% when you’re married filing a joint return and your income is $73,800 or less ($36,900 when you’re single).
When your income is between $73,800 and $457,600 ($36,900 and $406,750 for single filers), the maximum rate is 15%.
A 20% rate applies when your taxable income is more than $457,600 ($406,750 when your filing status is single).
The 3.8% surtax applies to your income from capital gains, interest, and dividends when your adjusted gross income exceeds $250,000 ($200,000 when you’re filing single).
Analyze your options
Your overall financial goals should be complemented by planning strategies for tax-efficient investing. For example, purchasing stocks and other securities that offer long-term growth potential instead of current income from dividends can help reduce the amount of income subject to the net investment income tax. However, if you need cash flow from your investments, you might choose an alternative tax-saving strategy, such as adding tax-free municipal bonds to your portfolio. A mix of the two could be preferable if you’re subject to the alternative minimum tax.
Likewise, the same analysis applies to investment accounts. Let’s say you own bonds or other investments that generate taxable interest income. Holding these assets in a taxable account means that you will pay federal income tax based on your ordinary tax rate. Including them in tax-advantaged accounts such as IRAs might be a better idea because you could delay the tax bill until you begin making withdrawals.