Tax Tips for the New Year

We have some timely tax tips from Dave Henderson of Duggan Bertsch. Check out his tips below.

2014 Year-End Select Tax Tips

Thanks to our sponsors:

View all sponsors

1.) Remember gift giving rules and strategies. Gift giving season is upon us. For gifts to charities, remember that you can charge your gift on 12/31/14 and still receive a 2014 tax deduction even though the bill is not paid into 2015. Gifts via checks by 12/31/14 also count for 2014 even though they are not paid until 2015. But remember that you generally need written acknowledgement from the charity to claim the deduction and this is easier to obtain when the gift is made. For larger charitable gifts or noncash gifts (e.g. securities, rental property, etc.) , consider whether a personal giving vehicle such as a donor advised fund or private foundation is appropriate. These vehicles allow a current income tax deduction for money dedicated to charitable purposes even if it is not actually given to a charity some years later and generally allows for the receipt of noncash gifts.

For gifts to individuals, remember that the gift must actually clear the bank by 12/31/14 if you are giving via a check and want it to count for 2014. Moreover, gifts to individuals can only be made free of the gift-tax up to $14,000 per person. Note that this a yearly amount and each year it is not used it is lost. Amounts in excess of this amount may be subject to the gift tax and usually result in the tax filing requirement to declare the gift. Remember that medical and education payments generally can be paid in unlimited amounts without concern for the gift tax if they are paid directly to the provider organization instead of to the person benefiting from the payments.

For larger gifts, giving is generally coordinated with the client’s overall estate plan. There have been significant changes in the U.S. estate, gift and generation-skipping laws in the last years. Older estate plans based on prior laws can now result in unintended results should a client die with those plans in place. Accordingly, clients should consider revising their estate plans in light of these legal changes. Additionally, professional fees related to the revision of your estate plans often are entitled to an income tax deduction.

2.) Review tax sensitive accounts (e.g. retirement and health saving accounts) for year-end tax moves. Have you saved enough into your employer’s retirement plan to obtain any match? If not, is there any opportunity to still do so for this year? The employer match is money you can receive without doing anything more than putting money into your retirement savings for your own benefit. If you are over 70 ½, have you taken out the required minimum distribution from your retirement plans where you are required to do so? If not then you are generally subject to a 50% penalty on the amount that should have been taken out. Have you spent all the money in your flexible spending account? If not, this money is generally lost at the end of year. Penalties and money forfeited are lost money.

3.) Investment income and taxes. The market was up for most taxpayers this year. If you sold stock for a capital gain this year, or perhaps a mutual fund is reporting capital gains income to you for 2014, then you should take a look at your portfolio and see if your other loss position which can be sold prior to year-end. Capital losses are able to offset capital gains. Care needs to be taken if the security sold is to be reacquired as the wash sale rules can disallow the deduction for the loss if they are violated. The tax savings of this strategy are even more important now with the Medicare Surtax of 3.8% imposed in addition to the income tax.

If you own a security that has appreciated and you are charitably inclined, consider gifting that stock to charity instead of selling the security and turning over the proceeds to your charity. If you sell the security and then turn over the proceeds then you will pay income taxes on any gain. However, if you turn over the security and then the charity sells the security then you will not pay tax on any gains associated with the security. In either case you will obtain a tax deduction for the charitable contribution for the value of the stock; however, by gifting the security to the charity you avoid any capital gains tax imposed on a sale.

4.) Small business taxpayers. Take advantage of the ability to currently write off capital purchases [e.g. computers, desks, tools, automobiles (special rules apply here)]. The Senate is expected to pass legislation already passed by the House and the President is expected to sign into law allowing small business to expense certain business assets in the year of purchase in large part instead of having to wait for future years. This tax benefit allows small businesses the ability to write off up to $500,000 immediately. Previous law limited this benefit to only $25,000 of purchases. This will expire as of 12/31/14, assuming the extender package does pass as expected. While this provision has been renewed for the last few years, each year including this provision becomes more difficult due to Washington politics and fiscal constraints.

In addition small business taxpayers might want to consider paying their children to provide the child with earned income. With earned income the child can usually make a Roth IRA contribution. Roth IRAs do not allow for a deductible contribution but do allow subsequent withdrawals (including both the contribution and earnings on the contribution) to be paid free of income tax. Roth IRAs allow for tax-free compound earnings over the lifetime of your children. Albert Einstein is rumored to have called compound interest the most powerful force in the universe. Compounding earnings tax-free may have trumped simple compound interest if Roth IRAs were around when Einstein was alive.

Also consider retirement planning. Do you have a plan? If so, does it remain appropriate? Significant deductions can be taken for contributions to qualified plans and many of the current plans allow for significant benefits to flow to owners and executives without violating the nondiscrimination rules. Newer types of plans have exploded in recent years and should be explored if you have not reviewed your retirement plan in the last few years.

5.) Consider spending money in a tax-deductible manner. Prepaying obligations, e.g. state income taxes, often can save on this year’s U.S. tax bill even if the payment can be deferred to January 15th of next year. You can also prepay a professional tax preparer for the preparation of your 2014 income tax return in 2015 and your January mortgage bill. Prepaying for education may be entitled to a state income tax break as well. Many states allow their residents to contribute to their state’s section 529 plan and receive a state income tax deduction or credit. Also, you should think about whether it is better tax wise to take a year-end bonus or other income in 2014 or defer it until 2015 (to pay the associated taxes in 2015). 

Bonus tip - Get started on 2015 now! Now is the time to review if you should review your tax withholding exemptions on your Form W-4. If you have a significant refund for 2014, you might want to consider decreasing the taxes you have withheld to put more money in your pocket during the year instead of receiving a large refund back when you file your return. The government does not pay interest for over withheld tax money. Additionally, review your pre-tax plans at works, e.g. 401(k)s, flexible spending accounts, health savings accounts, etc. to participate and make certain you have the appropriate amount elected (e.g. participating in your employer’s retirement plan at least to the extent necessary to obtain any employer matching contribution).

Thanks to our sponsors:

View all sponsors

Thanks to our sponsors:

View all sponsors