Special Issue: 2014 Tax Planning Roundup

What’s Inside


Tax Calendar

Dear Client, Colleague, or Tax Enthusiast,

Having just finished the extended 2013 tax filing season, we are aware of the very real need for individuals and businesses to review tax saving strategies. As always, savvy tax planning during the last quarter of the year can pay off greatly, resulting in lower taxes when you file your return in the new year. Some tax planning is fundamental, and certain people may benefit by accelerating tax deductions into 2014, while deferring income into 2015. However, be mindful of common pitfalls, such as alternative minimum tax and the phase out of deductions.

A distinct divide has grown between taxpayers reporting high income and the rest of Americans. Generally speaking, as a result of recent legislation (which increased taxes and eliminated some benefits), if your annual income is over $200,000 you must cope with far more tax complexity than other taxpayers.

In 2014, many taxpayers were flabbergasted to see how much tax they owed for their 2013 returns when compared to their tax obligation in 2012. The new wrinkles created in the tax code have made a huge impact on many people. With a little forethought and planning, many could have saved a substantial amount.

Remember, you still have time before December 31 to take actions that will reduce the tax you’ll owe for 2014.

Best Wishes,

Steve Moskowitz, Esq.
Founding Partner


Year-End Investment Tax Planning

The good news for many people is that, as of this writing, 2014 is shaping up to be another positive year for stocks. Stocks have risen substantially from their low point in early 2009, and many investors are now sitting on large paper gains.

While grim tidings haven’t come yet, many investors fear that they will. Stocks have come crashing down during previous bull markets in early 2000 and late 2008-that could happen again in 2015, 2016 or 2017. No one can accurately predict what tomorrow will bring, but many observers see the stock market as overvalued now and likely to fall back.

Because of this, investors may want to take some stock gains now, as a precaution against possible future price declines. In fact, some investors may have already taken gains as the market indexes reached record highs.

However, taking gains in taxable accounts can trigger income tax. High-income taxpayers could owe as much as 20% on long-term capital gains, plus a 3.8% surtax and applicable state taxes. What’s more, increasing your income could trigger additional taxes elsewhere on your return.

Looking for losses
The traditional solution is to take capital losses in conjunction with gains.

Example 1: Counting trades already completed this year, trades he’d like to complete before year-end, plus anticipated distributions from his stock funds; Nick Morton expects to have a total of $20,000 in long-term capital gains in 2014. If Nick has $25,000 worth of losses in his portfolio, he could take them before year-end and wind up with a $5,000 net capital loss for the year.

With a net capital loss, Nick would owe no tax on the gains he has taken and plans to take. He could deduct $3,000 of capital losses (the maximum allowed to offset ordinary income [although there is no limitation in the offset of capital losses against capital gains]) from the income on his 2014 tax return, thereby cutting his tax bill, and then carry over the excess $2,000 in capital losses for the tax benefit of future years.

These transactions could be completed if Nick has $25,000 of losses in his portfolio. But what if after a lengthy bull market Nick does not have additional losses to take? Even if Nick had sustained a huge amount of losses in 2008-2009, when the market crashed, he might have already used them all, offsetting gains and deducting losses during the intervening years.

What could Nick do if he has no old losses to use and no opportunity to take new losses? One option Nick has is to donate the stocks he plans to sell to charity (see the article, “Year-End Charitable Tax Planning” later in this issue). Nick could also give shares to family members who are in lower tax brackets (see the article, “Year-End Family Tax Planning” later in this issue).

If none of these various strategies are practical for dealing with Nick’s capital gains, he might simply postpone taking any more gains until January 2015. That approach won’t decrease his 2014 tax bill, but it will give Nick a full year to develop strategies to avoid tax on those gains.

Year-End Charitable Tax Planning
Donating appreciated assets (including securities) can be a thoughtful tactic for individuals who are unable to offset capital gains with capital losses.

Example 1: Lynn Knight invested $8,000 into an aggressive stock fund in 2009. These shares are now worth $20,000, thanks to some excellent selections, but Lynn believes it is now time to take her gains. However, selling these shares will generate a $12,000 long-term capital gain, costing Lynn thousands of dollars in tax.

In this scenario, Lynn has no old or new capital losses available to offset her gains. She does, however, have a commitment to donate $10,000 each year to her alma mater. Therefore, she donates her $20,000 of fund shares in December 2014, and notifies the school that she is making her contributions for 2014 and 2015.

With this maneuver, Lynn is able to receive a $20,000 charitable tax deduction for 2014, while also avoiding tax on the disposition of the appreciated shares. Additionally, the $20,000 Lynn planned to send the college is still in her bank account, giving her the opportunity to use this money to reinvest in assets she believes currently have investment appeal.

Simple strategy
In order to complete the previously described transaction, all Lynn has to do is get the appropriate account number from her alma mater and notify the fund company to make the transfer by year-end, for a 2014 deduction.

The situation would be different, though, if Lynn wanted to make a $1,000 charitable contribution to 20 different charities. To use her appreciated fund shares, she would have to deal with a huge amount of paperwork, getting the information from each charity and forwarding it to the fund company.

In these types of situations, a donor advised fund (DAF) can be used to handle the multiple transfers with ease. DAF’s are offered by many financial firms and community foundations.

Example 2: Intending to make multiple donations, Lynn has the fund company transfer her $20,000 worth of shares to a DAF she has specified. If she acts before year-end; Lynn will get the $20,000 tax deduction for 2014, she’ll avoid capital gains tax, and she’ll have cash in the bank to reinvest.

After completing the transfer, the DAF can sell the shares and place the $20,000 into Lynn’s account. Then Lynn, the donor, can advise the fund to send $1,000 to Charity A, $1,000 to Charity B, and so on. Even if this process runs into 2015 and future years, Lynn won’t lose her 2014 charitable tax deduction.

Year-End Family Tax Planning
Besides donating appreciated securities to charity, another solution for avoiding highly taxed capital gains is to transfer the relevant assets to a family member in a lower tax bracket. The recipient might be able to sell and pay little or no tax on the sale.

Example: Grace Fulton invested $10,000 in ABC Corp. shares years ago. The shares are now worth $18,000; Grace fears the trading price of ABC will drop, so she’d like to sell the shares. However, Grace will face a significant tax bill if she takes an $8,000 long-term capital gain.

Therefore, Grace gives the shares to her son Eric, who sells them. Grace’s basis in the shares ($10,000) and her holding period (longer than a year) carry over to Eric, so he reports an $8,000 long-term capital gain. As long as Eric will owe less tax on a sale than Grace would have owed, the Fulton family will come out ahead.

Real problems
This scenario can work in real life, but there are some issues to keep in mind. For one, gifts over $14,000 to any one recipient in 2014 may trigger the requirement to file a gift tax return. There may not be any gift tax owed, due to a $5.34 million lifetime gift tax exemption, but there can be paperwork requirements and the potential loss of estate tax benefits for estates in excess of $5.34 million for single people or $10.68 million for married couples.

Moreover, the so-called “kiddie tax” limits the advantage of transferring assets to youngsters before a sale. In 2014, “kiddies” are taxed at their own tax rate on their first $2,000 of unearned income and generally owe little or no tax on this income. Beyond that $2,000, though, unearned income is taxed at the parent’s rate. Thus, if Eric Fulton has an $8,000 long-term gain from a stock sale and no other unearned income in 2014, $2,000 would get favorable tax treatment, but the other $6,000 would be taxed at his mother Grace’s rate.

The key question, then, relates to which youngsters are considered “kiddies”. Generally, that includes children 18 or younger. “Kiddie tax” status persists until age 24 for full-time students who provide less than half of their own support. Consequently, the strategy described in example 1 would offer little benefit if Eric is a college student this year, age 23, living nearby and spending most of his time going to class or studying.

However, if Eric is age 24 and going to graduate school, the story can have a happier ending. Instead of selling the stock and paying tax on the gain, Grace can give the shares to Eric, who can make the sale this year. In 2014, a single taxpayer can have taxable income (after deductions) up to $36,900 and owe 0% on long-term capital gains. (The 0% tax rate for such taxpayers also applies to most stock dividend income.) As a result, Eric could keep all $18,000 from the stock sale and use the untaxed dollars to pay his school bills.

In 2014, the 0% rate on long-term capital gains also applies to married couples reporting up to $73,800 on a joint tax return. Therefore, transferring appreciated securities to family members with low to moderate income can be a substantial tax saver. Such gifts might be made to a married son or daughter who is buying a home, for example, or to retired parents who need financial help. However, as with all financial decisions, you should think carefully about all possible outcomes before applying this, or any other strategy.

Year-End Retirement Tax Planning
One reliable way to reduce the impact of higher tax rates, surtaxes, phaseouts and so on is to make tax deductible contributions to retirement plans. In 2014, the maximum salary (and tax) deferral for a 401(k) or similar plan is $17,500 or $23,000 for those who are 50 or older. If you are not maximizing such contributions already, consider increasing the amount by year-end.

Business owners, professionals, and self-employed individuals may be able to make even larger deductible contributions to retirement plans. Often, the deadline to create such a plan for the year is December 31, even though the actual contributions may be made after this date. Our office can help you determine which type of plan would be best for you and your employees.

Refining Roth IRAs
The end of the year may be a good time to convert a traditional IRA into a Roth IRA. All Roth IRA distributions become tax-free after five years, if you are at least age 59. What’s more, the five year clock starts on January 1 of the conversion year. Thus, a December 2014 conversion will have a January 1, 2014, start date for this purpose and reach the five-year mark on January 1, 2019, just over four years from now.

The downside of a Roth IRA conversion is that you must pay income tax on all pretax dollars you move from your traditional IRA to a Roth IRA. Converting can be extremely taxing.

Example 1: Diane Carson is a single taxpayer with $150,000 of taxable income in 2014 before a Roth IRA conversion. If Diane converts her traditional IRA, which contains $250,000 in pretax dollars, to a Roth IRA, she will report $400,000 of taxable income on her tax return. This added income will be taxed mostly at a 33% rate so Diane would owe more than $80,000 to complete the conversion.

In this example, Diane has an excellent idea of what her taxable income will be for 2014. Her $150,000 of taxable income puts her in the 28% tax bracket, which caps at $186,350 for single filers this year. Because of this, Diane decides to convert only $35,000 of her Roth IRA during 2014. She’ll owe $9,800 in tax for the conversion (28% of $35,000), which she can pay with non-IRA funds. Over time, a series of these partial conversions can build up Diane’s Roth IRA to become a valuable source of tax-free retirement income.

Suppose, though, that Diane’s taxable income varies from year to year. In that case, she might do a much larger Roth IRA conversion. A conversion in 2014 can be recharacterized (reversed) back to a traditional IRA, in whole or in part, until October 15, 2015.

Example 2: Diane converts $100,000 of her traditional IRA to a Roth IRA in 2014. When she has her tax return prepared in April 2015, Diane learns that her taxable income would be $166,350, without any income from the Roth IRA conversion.

As mentioned, the 28% tax bracket for a single filer goes up to $186,350 in 2014. Therefore, Diane can add $20,000 to her taxable income for the year, still taxed at 28%. Diane recharacterizes enough of her Roth IRA conversion to leave her with a $20,000 Roth IRA conversion, in the 28% bracket. She can repeat this process every year, building up her Roth IRA at a relatively low tax cost.

Year-End Estate Tax Planning
With the federal estate tax exemption now at $5.34 million for a single individual or $10.68 million for a married couple and likely to be even higher in 2015, planning for federal estate taxes may seem unnecessary for many taxpayers. This may be especially true for those who are married because so-called exemption “portability” between spouses effectively gives a couple the ability to bequeath up to $10.68 million to their loved ones in 2014, free from federal estate tax. However, federal estate tax planning can still be extremely important for wealthy families, particularly those who control a closely held company they’d like to keep in the family. Such families will likely need a fairly complex plan, one that might take many months to develop and approve.

Nevertheless, year-end estate tax planning can be helpful for many people, depending on their place of residence. Many states have estate or inheritance taxes, as well as some whose exemption amounts are far below $5.34 million. In such states, basic planning may save your heirs many thousands of dollars. Moreover, there is no guarantee that Congress won’t lower the federal estate tax exemption in the future; the steps you take now could help protect your descendants in the future.

Tackling the gift tax
Giving away assets you’re not likely to use is one straightforward method of trimming your taxable estate. In 2014, the annual gift tax exclusion amount is $14,000. This means you can give up to $14,000 (a year) worth of assets to an unlimited number of recipients, with no tax consequences. This unlimited “annual exclusion” doubles for married taxpayers but requires the filing of a gift tax return, as explained below.

Example 1: Eve Drake gives $14,000 to her son Craig, $14,000 to her daughter Brenda, and $14,000 to her old college roommate who has fallen on hard times. These gifts remove $42,000 from Eve’s estate, yet she doesn’t even have to file a gift tax return. This assumes she has made no other gifts to these individuals during 2014.

Paired planning
The $14,000 annual gift tax exclusion is per person, so a married couple effectively can give up to $28,000 to each recipient this year, free of gift tax. Each spouse can make gifts up to $14,000 per recipient or one spouse can make the $28,000 gifts from a joint account. Even if only one spouse wants to make the double gift, this can be done with a process known as gift splitting.

Example 2: Eve Drake, who is married to her second husband Brett, would like to make gifts exceeding $14,000 to her children from her first marriage this year. Brett is not willing to contribute to the gifts but is willing to let Eve use his annual exclusion.

Therefore, Eve gives $28,000 of her own money to her son and $28,000 to her daughter. Eve can file a gift tax return (IRS Form 709), on which Brett gives his consent to split gifts. Effectively Brett has made a $14,000 gift to each person for tax purposes, even if not in reality. This consent means that all gifts made by Eve or Brett during the calendar year will be split for tax purposes and Brett loses absolutely nothing since he maintains his annual exclusion for an unlimited amount of donees.

Over the limit
What happens if Eve makes larger gifts-say, $30,000 to both of her children? Chances are that she won’t have to pay a gift tax because of the $5.34 million lifetime gift tax exemption.

Example 3: Eve gives $30,000 to her son and $30,000 to her daughter in 2014. When Eve files a gift tax return, the first $14,000 of both gifts is covered by the annual exclusion, but the other $16,000 of both gifts-$32,000 altogether-is covered by her lifetime exemption. Assuming that Eve has not made over $5.34 million of such countable gifts, she won’t owe gift tax. However, at Eve’s death, all such countable gifts will be subtracted from that year’s estate tax exemption so in the current year her estate’s exemption would be $5.34 million less the $32,000. This is not a problem for most taxpayers, but something to consider for people who will leave estates in excess of $5.34 million.

The previous example illustrates what might happen if appreciated assets are given to children or parents in a lower tax bracket as described in this issue’s article regarding family tax planning. Even if you give $50,000 or $100,000 worth of assets to a single individual, it is unlikely that you will owe gift tax. You will have to file a gift tax return, and your lifetime gift/estate exemption will be reduced. But you or your estate may not actually owe any tax, if today’s generous exemptions remain in effect.

Year-End Business Tax Planning
As of this writing, the status of equipment expensing for 2014 is unclear. The same is also true for bonus depreciation. The ongoing uncertainty surrounding these issues may have an impact on your year-end plans to acquire business equipment.

Section 179 of the tax code allows for certain types of equipment to be expensed: the purchase price is fully tax deductible when the item is placed in service, rather than deducted over a multi-year depreciation schedule. Both new and used equipment qualify for this tax benefit, with some exceptions (such as real estate).

In recent years, Congress has consistently expanded the benefit of Section 179. By 2013, up to $500,000 could be expensed from the purchase of equipment eligible for the deduction, and a business could buy up to $2 million worth of eligible equipment before losing any of this benefit.

Example 1: In 2013, DEF Corp. bought $2,085,000 of business equipment eligible for the Section 179 expense deduction and elected to not take bonus depreciation on the equipment. This was $85,000 over the Section 179 limit, so DEF could deduct only $415,000 (the $500,000 ceiling minus $85,000) as an expense in 2013 under Section 179. DEF must recover the other $1,670,000 of the cost of its 2013 purchases through depreciation methods.

The $500,000 and $2 million limits for Section 179 expired after 2013. Under current law, the 2014 limit for expensing is $25,000 worth of purchases (plus an inflation adjustment) with a phaseout beginning at $200,000 in purchases.

Similarly, bonus depreciation was available for new equipment until it expired after 2013. This provision allowed a 50% depreciation deduction on the purchase of new equipment before using an extended schedule to depreciate the balance. Currently, bonus depreciation is not permitted in 2014.

Dealing with doubts
Both houses of Congress have indicated interest in restoring an expanded Section 179 deduction, as well as bonus depreciation for 2014. However, any updates probably won’t be announced until late in the year. If that’s the case, how should business owners and self-employed individuals proceed?

Start by acquiring any equipment that your company truly needs for current and future profitability. If your business needs the item now, buy it now, and deduct the cost as the tax law permits.

If the timing isn’t urgent, consider limiting purchases to those that will bring 2014 acquisitions up to $25,000, which will be the Section 179 ceiling if no extension is passed. Contact our office in late November or early December for an update on the current relevant legislation.

Keep in mind that equipment must be placed in service before the end of 2014 to qualify for depreciation deductions (if reinstated) or expensing this year. Merely paying for equipment in 2014 does not entitle you to a deduction. However, this also means that you can get the 2014 tax benefits for equipment placed in service during 2014 even if you defer payment for the equipment until 2015.

Tax Calendar


November 10

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the third quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time.

November 17

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in October if the monthly rule applies.


December 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in November if the monthly rule applies.

Corporations. Deposit the fourth installment of estimated income tax for 2014.