Current individual income tax rates of 10, 15, 25, 28, 33, 35 and 39.6 percent will be in place for 2015, as will current tax treatment of capital gains and dividends. The limitation on itemized deductions and the personal exemption phase-out are also expected to remain unchanged for 2015.
One traditional planning tactic is to spread recognition of your income between years by postponing year-end bonuses, maximizing deductible retirement contributions, and delaying your year-end billings. You may also want to pre-pay real estate taxes or mortgage interest. Timing recognition of your capital gains and losses at year’s end may minimize your net capital gains tax and maximize deductible capital losses.
Did you get married or divorced? Change jobs or retire? Review events in 2014. A change in employment, for example, may bring about severance pay, sign-on bonuses, stock options, moving expenses, and COBRA health benefits, among other changes that affect your taxes.
You can contribute up to $5,500 to an individual retirement account or Roth IRA for 2014 and, if you’re 50 or older, make catch-up contributions of an additional $1,000. You also have until April 15, 2015, to make an IRA contribution for 2014. A myRA account—a new type of retirement savings vehicle from the federal government for people who don’t have an employer-sponsored retirement plan—might also receive contribution tax benefits.
You can make tax-free gifts of $14,000 per recipient (unlimited in number) for 2014. You and your spouse can also combine gift-tax exclusions and make tax-free gifts per recipient of up to $28,000. Bear in mind too that you can make unlimited tax-free gifts for qualified tuition or medical expenses of another person (must be paid directly to a medical or educational institution).
The new net investment income (NII) tax may become part of your tax planning. The Affordable Care Act created the NII to help fund health-care reform. There are three categories of NII:
- Gross income from interest, dividends, annuities, royalties, and rents if the income is not derived in a trade or business;
- Income from a “trade or business” that’s a passive activity under Code Sec. 469, or is from a business as a financial trader; and
- Net gains from the sale of property, unless the property is held in a non-passive trade or business.
Certain income thresholds trigger the NII: $200,000 for single taxpayers; $250,000 for married couples filing a joint return; and $125,000 for married couples filing separately.
Extenders Add Complexity
Prospects for permanent extension of many of the so-called tax extenders also appear dim before year-end. However, there will likely be an extension of the extenders, probably for two years. That means 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. Keep in mind that some of the extenders impact other provisions of the Tax Code.
The list of expired 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 and the mortgage insurance premium deduction.
Some extenders were made permanent by ATRA. They include the student loan interest deduction, special enhancements to the earned income tax credit, the child tax credit and the child and dependent care credit, as well as special enhancements to the adoption credit and adoption assistance programs.
Any news about the fate of the extenders will likely not come until late in 2014 or even in early 2015. The House and Senate have taken very different approaches to the extenders. The House has passed several extenders in stand-alone bills that would make them permanent. The Senate has taken the traditional approach of wrapping all the extenders in a comprehensive bill (called the EXPIRE Act). When lawmakers return to work after the November elections, the leaders of the House and Senate are expected to confer about how to move the extenders before year-end.
Year-End Business Planning
As with the individual “extenders” that add complexity to planning so do the business incentives that have officially expired after 2013 often referred to as the “business extenders.” These include enhanced Code Sec. 179 expensing, the Work Opportunity Tax Credit (WOTC) and many more. Along with theses extenders there is also the bonus depreciation that has officially expired. We recommend completing tax plans that incorporate the extension of these incentives as well as the final expiration to understand the possible results if they do not get extended.
The ACA now mandates that you carry health insurance or make a shared responsibility payment, unless you’re exempt. For many, employer-provided health insurance, Medicare, or Medicaid satisfies this mandate.
If you must make a responsibility payment with your 2014 return, you owe 1/12th of the annual payment for each month that you or your dependents are not covered and not exempt.
For 2014, the total annual payment is generally the greater of:
- 1 percent of your household income above the tax return threshold for your filing status (for example, your income above $10,150 if you are younger than 65 and file using Single status, or your income above $22,700 if you file Married Filing Jointly with your spouse and you’re both 65 or older).
- A flat dollar amount of $95 per adult and $47.50 per child, to a maximum of $285.
The annual payment maxes out at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014 ($2,448 per individual, $12,240 for a family of five or more).
We have a complete interactive 2014 tax planning guide available to you free at www.taxguideonline.com/pwbcpas. Check back frequently for updated information based on the actions of congress.
If you have any questions about the year-end planning considerations we have reviewed or have other planning questions, please contact our office at 763-550-1100
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