Tax Planning Summer 2014

1. Make your estimated tax payments & consider paying your state taxes in full before December 31, 2014. Estimated tax payments for the 2014 tax year are due on April 15, June 16, and Sept. 15 of 2014, and Jan. 15 of 2015. If you underpay one or more installments, interest is charged until the day you catch up. Any payments outstanding after April 15 of 2015 are subject to a 0.5% per month “failure to pay” penalty on top of the interest. By paying your state income tax in full before December 31, 2014, you may, if you otherwise qualify, be eligible for a deduction on your federal return.
2. Bump up pre-tax retirement plan contributions. Elective contributions, the ones you ask your employer to withhold from your paycheck, reduce current-year taxable income. Compare the amount you’re presently depositing into your account with the maximum allowed; make adjustments now to spread the impact over the rest of the year. The maximum 401(k) contribution for 2014 is $17,500. Persons who are 50 or older this year can add an additional $5,500.
3. Open an education savings account. There is no federal tax deduction for contributions made to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college expenses in a taxable account, you could realize tax savings by opening a 529 plan instead. Earnings on plan assets are able to grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.
4. Reset basis with capital loss carry-forwards. Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income? Planning point: reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.
5. Hold off on retirement plan withdrawals. In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible. For example, you could sell long-term stocks with a high basis first. The current tax savings is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts.
6. Plan for required minimum distributions. What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70? Tax-efficient investing strategies can reduce the tax on the income you’ve earned on the distributed amount. Another suggestion: using the funds for charitable donations can offset some of the tax from the distribution.
7. Shift income. Broaden your tax-planning focus to include family members. For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings, as long as you meet the qualifications.
8. Gifting offers similar benefits. You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.) In 2014, you can give $14,000 to an unlimited number of people each year and you can give a total of $5.34 million per donor in a lifetime. Married couples can give $10.68 million lifetime without incurring a penny of gift tax.
9. Track passive activity losses. Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities. The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.
10. Preserve deductions. You’ve heard it before: record keeping is essential. Examples of tax breaks that may be disallowed if you cannot provide proof include charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses. If you neglected to start tracking these expenses at the beginning of the year, get going now.
11. Check dependent status. Keep your college student qualified as your dependent by monitoring the “support” test. The rule: generally, your child cannot provide over one-half of his or her own support during the year. Also remember, other people, even those not related to you, may qualify as your dependents, including parents in nursing homes.
12. Update payments. Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business.
13. Review health insurance subsidies. Review your eligibility for the advance premium tax credit, a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange, if you qualify.

The Business File

Do a mid-year review of your business tax situation. Here are three areas to start with.

• Calculate your basis. If you are an S corporation shareholder, knowing your basis is key to determining whether you can deduct current-year losses. The reason: losses in excess of your basis are generally “suspended” for use in later years when your business has income. Basis is also important if you plan to take nontaxable distributions. In cases when distributions exceed your investment in the company, the distributions can be taxed as capital gain.What to do: Perform a check-up to give yourself time to re-establish basis and avoid surprises at the year-end, and take additional tax benefits if you qualify.
• Update expensing policies. The new “repair” regulations became effective January 1. These regulations control how you will classify the cost of assets, supplies, and repairs and maintenance – some of which you will be able to expense immediately if you have the required policies in place.What to do: Review asset and expense accounts to determine if current practices are in compliance with the new rules. Need a good reason to get started? Because the regulations can also affect prior years, you may be able to benefit from amending previously filed tax returns.
• Re-examine your business structure. Whenever tax rates for corporations move in a different direction from those of individuals, an evaluation of your business entity makes sense. That’s because when your business is an S corporation or a partnership, the business does not generally pay federal income tax. Instead, the income “flows through” to you and is taxed at your rate. Regular “C” corporations, on the other hand, pay tax on business income at corporate tax rates, which are presently lower than individual rates, however there may be another level of taxation when distributions are made to the individual.What to do: Analyze the benefits of potential current income tax savings against your future goals. For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision.