Season’s Greetings to all!
With the end of the year quickly approaching, it is important for many people to focus on year-end tax planning. It may be possible to significantly impact your 2014 tax situation by taking certain actions before the end of the year.
When it comes to year-end tax planning, you need to have a good understanding of both your own financial situation and the tax rules that apply. For some, that’s going to be a little challenging this year because a host of popular tax provisions, commonly referred to as “tax extenders,” that expired at the end of 2013, but In one of its final actions, the 113th Congress passed the Tax Increase Prevention Act of 2014. This legislation retroactively extends these tax provisions, which are now effective through the end of 2014. If any of these provisions applies to you, it may be important to take action before the end of the year. These provisions are summarized below, but see attached PDF file for more specifics.
- The ability to make qualified charitable contributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you were 70½ or older. Such distributions were excluded from income but counted toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA.
- Increased Internal Revenue Code (IRC) Section 179 expense limits and “bonus” depreciation provisions.
- The above-the-line deduction for qualified higher-education expenses.
- The above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.
- For those who itemize deductions, the ability to deduct state and local sales taxes in lieu of state and local income taxes.
- The ability to deduct premiums paid for qualified mortgage insurance as deductible interest on IRS Form 1040, Schedule A.
Other year-end tax considerations include:
Timing is everything
Consider any opportunities you have to defer income to 2015. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.
Similarly, consider ways to accelerate deductions into 2014. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or, you might consider making next year’s charitable contribution this year instead.
Sometimes, however, it may make sense to take the opposite approach–accelerating income into 2014, and postponing deductible expenses to 2015. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2015; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.
Factor in the AMT
Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT–essentially a separate, parallel, income tax with its own rates and rules–effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2014, prepaying 2015 state and local taxes won’t help your 2014 tax situation, but could hurt your 2015 bottom line.
IRAs and retirement plans
Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pretax basis, reducing your 2014 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or pretax, so there’s no tax benefit for 2014, but qualified Roth distributions are completely free from federal income tax, which makes these retirement savings vehicles appealing.
For 2014, you can contribute up to $17,500 to a 401(k) plan ($23,000 if you’re age 50 or older), and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2014 contributions to an employer plan typically closes at the end of the year, while you generally have until the April 15, 2015, tax filing deadline to make 2014 IRA contributions.
Talk to a professional
When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.
I hope you find this information to be helpful. Feel free to forward to anyone who may benefit. Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.
Note that planning tips and other info. are now posted on my website, https://truenorthfinancialplanning.com/, under Resources/Blog. Feel free check it out.
I hope everyone has a happy and healthy holiday season.
Thomas C. Dettre, CPA, MBA
President and Founder
True North Financial Planning, LLC
This information does not provide investment, legal, or tax advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.