Year-End Tax Planning and Preparation

Where has the year gone?!!!

We half way through the final month of 2014 and before you start (or finish) your holiday shopping and plans for Christmas we need to consider a few items regarding Year-End Tax Planning And Preparation.

WHY IS YEAR-END TAX PLANNING AND PREPARATION IMPORTANT?

Many of the items we are going to discuss require action   before year-end, and definitely before you or your tax preparer begin to compile your tax return for 2014.  While taxes are inevitable, assuming you have taxable income, with proper tax planning you can maximize your potential for tax savings.

Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013.  Some of these tax breaks may be retroactively reinstated or extended, but Congress may not decide the fate of these tax breaks until the very end of the year (or possibly only in 2015).  These breaks include, for individuals: the option to deduct state and local sales and use  taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; tax free IRA distributions for charitable purposes by those 70-1/2 or older; and the exclusion of up-to-$2 million of mortgage debt forgiveness on a principal residence.  There are many other tax breaks for businesses that are outside the scope of this discussion that have yet to be extended.

SO WHAT SHOULD BE CONSIDERED?

  1. Evaluate capital gains and losses – if you have net capital gains, consider selling some loss positions in order to shelter the capital gains realized previously in 2014. Keep in mind, if you want to re-establish your position in the investment, you’ll need to wait at least 31 days before you repurchase in order to avoid the “wash sales” rule, which effectively disallows the recognition of your trading loss on that position.  Also, review your portfolio for possible positions that could be considered worthless and written off against previously recognized capital gains.  Please remember that you can’t deduct more than $3,000 of net capital loss for any given year, but you can carry the excess losses forward into 2015, and beyond.
  1. Consider postponing income if possible – if you have any bonus or deferred income payment due from your employer, consider postponing the receipt of those payments until 2015, if you think your taxable income will be lower next year. While we don’t anticipate an increase in tax rates for 2015, that is always a possibility and a risk  to postponing any 2014 income.
  1. Accelerate deductions into 2014 to lower your 2014 tax bill -Consider making charitable contributions before year-end to benefit from higher itemized deduction limits in 2014.
  • Consider paying or deferring 2014 property tax depending on which year is more beneficial.  Since most individuals are cash basis taxpayers, you may deduct property taxes in the year they are paid.  If you want to deduct those taxes in 2014, please pay before December 31st.
  • Consider paying any outstanding medical expenses if your total medical expense  for 2014 will be in excess of 10% of your adjusted gross income.
  • Consider prepaying your January 2015 mortgage interest in 2014 in order to accelerate the deduction in the current year.
  • Be sure to pay any margin interest before December 31, 2014 since interest accrued at year end is only deductible if actually paid.
  • Consider paying any state or local income taxes that might be due for 2014.  You can prepay your 4th quarter estimate (which is typically due January 15, 2015) prior to December 31, 2014 for deduction in 2014.
  1. Evaluate any stock options that you might have to determine whether you should exercise those options, whether ISO’s (Incentive Stock Options) or Non-Qualified options, prior to December 31, 2014.
  1. Evaluate your 2014 contributions to your retirement accounts to make sure you have maximized your eligible contributions and are taking advantage of any matching contributions by your employer. The maximum amount allowed for deferral for 2014 on 401k plans is $17,500 (you can add the catch-up allowance of $5,500 if over age 50).
  1. Depending on your gross income and tax rate, consider converting some of your retirement or IRA accounts to Roth IRAs if your effective tax rate is low.  This only  applies to individuals over 59-1/2 who are not subject to the 10% premature distribution penalty.
  1. Consider making gifts sheltered by the annual gift tax exclusion of $14,000 to beneficiaries and other individuals, if you have a sizable estate and want to protect your assets from estate tax (taxable estates over $5.3M for 2014), or desire to transfer assets to loved ones during your lifetime.
  1. Evaluate making traditional IRA contributions (both deductible and non-deductible) or Roth IRA contributions depending on your adjusted gross income. There are many limitations for funding IRA plans based on your income and retirement plan coverage.  This will have to be determined on an individual basis.
  1. Consider the effect of the net investment income surtax of 3.8% on net investment income if your modified adjusted gross income is in excess of $250,000 for married-filing joint filers ($200,000 for single taxpayers).

These are just a few items that should be considered before year-end, and this is not a complete list.  With all the limitations and special rules, your specific situation should be evaluated for effective tax planning.