Many of Last Year's Tax Breaks - Extended

The major tax news at the end of last year was 55 tax breaks expired on December 31, 2013.  During all of 2014 tax planners and tax payers all were awaiting a final decision on whether or not many of these will be renewed or revised.  As the year draws to an end, Congress is backing off of revisions and proposing simply extending these breaks.

As a result those 55 tax breaks that expired last year will be extended.

Congressional Republicans on Tuesday said the measures would be renewed retroactively to Jan. 1, 2014 but only through the end of 2014.

In the next couple of weeks tax experts will be watching the Congressional action carefully.  Those 55 tax breaks are:

• Tax-free distribution from individual retirement plans for charitable purposes.
• Reduction in S corporation recognition period for built-in gains tax.
• Credit for energy efficient appliances
• Deduction for qualified tuition and related expenses
• Employer wage credit for activated military reservists
• Non business energy credits
• Deduction for state and local general sales tax
• Additional first year depreciation for 50 percent of basis of qualified property
• Incentives for biodiesel and renewable diesel fuel
• Credits for research and experimentation expenses
• The remaining 45 are mostly business credits

End-of-Year Tax Planning

It’s time to start making your year-end plans even though this year’s tax rules are pending in Congress and not yet finalized.  Lawmaking tax writers are waiting until the last minute to revive a series of tax breaks that lapsed at the end of 2013.  These include the deduction for state sales taxes in lieu of income taxes and direct transfers from IRAs to charity up to $100,000 for people age 70 ½ and up.  Despite the lawmakers’ reluctance to take action until after Election Day (Nov. 4) we believe many of the tax breaks will be renewed for 2014 and 2015.

The key to end-of-year tax planning is to weigh your options for both 2014 and 2015.  You want to minimize the tax impact for both years, not just one.

Some taxpayers can accelerate income into 2014 to take advantage of a lower income and tax bracket, while other taxpayers may be able to defer income into 2015 for the same reason.

State and local income tax are itemized deductions.  The decision to pay, underpay or overpay can affect either year depending on your situation.

There are a number of other deductions such as interest, charitable donations, and medical expenses that need to be considered.

Knowing your tax position before the holidays is always a good idea. Contact your Wealth Advocate to discuss your income tax concerns and end the year with a reliable plan.

Fall is Tax Time

It’s the end of summer, the best time of the year to think about your income taxes. Seriously! 

Granted, there are some last minute moves that can and must be made at year-end, by December 31. Why wait until December?  More than halfway through the year is great for planning. You have a good idea of what your earnings will be, and you have time to take steps that could cut the taxes you will have to pay.

If you have not filed your 2013 tax return because it is on extension (you have until October 15, 2014), get it done now. Rushing through it in October is not a positive move.

For 2014, will you owe or get a big refund? You probably should adjust your withholding if either is the case.  Payroll withholding should provide “just enough,” not too much and not too little. Changing your withholding is easy. Just submit a new W-4 to your payroll office.

Do you pay estimates?  Now is a great time to reassess your estimated tax situation. You can adjust your 3rd quarter, (due September 15) and 4th quarter payments.

Is your 2014 tax-filing material building up in a pile? Straighten it out now. It will make it filing your return next year much easier.

Your favorite non-profit organization will happily pick up unwanted household items and clothing any time of the year. So help out the charities now. Just be sure to get a receipt and put it in your newly created tax filing system. Household goods, furniture, clothing and nick-knacks can add up to very meaningful contributions. List them out with the following information:  Description of item, approximate acquisition date, original purchase price or original value, date of donation, organization receiving donation, condition of item, (excellent, good, fair, etc.), estimated value (10% - 30% of original).  You will be surprised at the amount of the donation. If any item exceeds $5,000 in value you must obtain an outside, independent appraisal.

Earlier is better when it comes to retirement plan contributions. 

There are many other moves and ideas you can make or do. Contact your Wealth Advocate for more tax planning ideas.

Wade Financial Group is on your side for tax planning.

Summertime is a good time to refresh gift planning ideas

Charitable Trusts

As interest rates change, certain types of trust gift planning change.
Charitable Remainder Annuity Trusts: These trusts pay an annuity to the donor or another person for a set term, with the remainder going to a charity.  The donor gets an up-front deduction for the value of the charities remainder interest, which is larger when a higher interest rate is used.
Charitable Lead Annuity Trusts:  These trusts pay an annuity to a charity for a set term, with the remainder passing to the donor or someone such as a family member.  The donor gets to claim an up-front deduction for the present value of the charities annuity interest, which decreases as interest rates rise. Grantor-retained annuity trusts, where the person who sets up the trust gets an annuity for a set term are also hurt by higher rates.  Any balance left after the term expires goes to whoever the grantor originally named. Higher rates boost the potential gift tax bill.

Other Gifting Strategies

Do not waste the annual gift tax exclusion of $14,000: 
You can give up to $14,000 each to a child, grandchild or other person free of gift tax and it does not count against your “life-time” exemption.  If you’re married, your spouse also can give $14,000, doubling the tax free amount.
The 2014 “life-time” estate and gift tax exemption is $5,340,000.  You will not owe any gift tax on gifts over $14,000 as long as you do not use up your $5.34M exemption.
Pay a Donee’s tuition or medical costs directly:
The payments made directly to the educational institution or medical facility do not count against the $14,000 annual gift tax exclusion.
Give Appreciated Assets When Donating to Charity:
The appreciation escapes capital gains tax and you get to deduct the full value if you’ve owned the asset for over a year.
Keep Receipts and Records for Personal Property Donations:
Donations of gently used household items, clothing, furniture, etc. can add up to a substantial sum.  Keep a list of the items donated and note the condition of the item (e.g. excellent, good, fair).   An acceptable value for most items donated is 15% to 25% (or more) of the original cost.

Tom's Tax Tips: Alternative Minimum Tax

How does the Alternative Minimum Tax Work?

The Alternative Minimum Tax (AMT) is a separate, independent tax calculation completed on a separate tax form (#6251).  AMT uses its own set of rates and its own rules for deductions which are generally less generous than the regular tax rules. Because of these separate, complicated rules, the only way to determine if you owe the AMT tax is by filling out the forms (essentially doing the tax calculation a second time).  Thank goodness for professional tax software made available to everyone at an economical cost (and of course qualified professionals who complete your tax return for a fee).

If your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest you most likely fall into an AMT tax category.   Ditto if you exercised incentive stock options during the year, or if you own a business, rental properties, partnership interests or S corporation stock. If you earn more than $100,000, AMT calculations are pretty much required.

Alternative Minimum Taxable Income

AMT rules require adding back some tax deductions and income exclusions to your regular taxable income to arrive at your alternative minimum taxable income. Here is where the most everyone making over $75,000 gets hit!

First, add back the personal and dependent-exemption deductions ($3,900 each in 2013).   Then, if you do not itemize, the standard deduction is added back ($12,200 for joint filers in 2013; $6,100 for singles in 2013).  The state, local and foreign income and property tax write-offs, as well as your home equity loan interest, if the loan proceeds are not used for home improvements also get added back.

The AMT also ignores some itemized deductions, such as investment expenses and employee business expenses, and some medical and dental expenses. AMT rules add the interest from some private-tax-exempt activity bonds to income. Finally, AMT rules force you to pay taxes on the “spread” between the market price and the exercise price of incentive stock options granted by your employer. For example, if you exercised an option to buy 1,000 shares of stock for $3 a share and the stock was trading at $15, the spread would be $12 a share, or $12,000. Under the regular rules, you wouldn't pay current taxes on this amount, but under the AMT, it’s considered income.

Alternative Minimum Tax Benefits

AMT rules allow a couple of small benefits you do not receive under the regular tax rules. For example, while you can’t deduct state, local and foreign taxes under AMT rules, you can exclude the refunds, which are considered income under the regular tax rules. And because you’re taxed on the spread on your incentive stock options, your tax basis for the option shares you bought is higher under AMT rules, meaning your future AMT tax bill will be lower when you sell those optioned shares.  This stock basis adjustment, of course, requires good record keeping.

The AMT form has quite a few other rules that are pluses and minuses related to rental properties, partnerships, and other business entities. My intention is to give you a glimpse of the complicated rules so I will limit the rules explanation to the above paragraphs.

Exemption Parameters

Lastly, the AMT exemption is deducted from the recalculated AMT taxable income -- $80,800 for 2013 joint filers; $51,900 for unmarried persons; $40,400 for those who use married filing separate status. However, this exemption is reduced by 25 cents for each dollar of AMT taxable income above the applicable annual threshold. For 2013, the thresholds are $153,900 for married joint-filing couples, $115,400 for singles, and $76,950 for folks who use married filing separate status.  After the exemption (if any) has been deducted, the result is subject to the AMT rates:

1. 26% on the first $179,500 for 2013 or $89,750 for if you are married and file separately from your spouse and
2. 28% on the excess. If the AMT exceeds your regular tax, you have to pay the greater amount. 

Technically, the AMT is shown on your federal income tax return as just the liability over and above the regular tax, and this figure is entered on page 2 of Form 1040.

ALERT:  There may be a recovery of some of the AMT paid.  It’s possible to be eligible for the so-called minimum tax credit, which allows taxpayers to claim a credit on their tax return in future years for some or all of the extra AMT tax you paid.  Another tax form, 8801, is necessary to determine if you are eligible. For whatever reason, the tax rules say that exercising incentive stock options is one of the few things that qualify you for the AMT credit, so if that’s the reason or one of the reasons you paid an AMT tax, make sure this credit calculation form is included in your tax return.

New Simplified Home Office Business Use Deduction

The IRS has provided a new, optional, “Safe Harbor Home Office” expense deduction effective for tax years beginning on or after January 1, 2013!

The deduction allowed is $5 per square foot of the “qualified use” space up to 300 square feet.  The maximum deduction is $1,500.  

·    A home office is considered the taxpayer’s primary place in which he or she conducts trade or business.

·    The home office may or may not be part of or attached to the taxpayers residence.  It may be a separate structure on the property used exclusively, on a regular basis, as a home office.

·    A home office is where the taxpayer will meet clients, customers or patients during the normal course of business.

·    Home-related itemized deductions are claimed 100% (without allocation) on Schedule A (for example, mortgage interest and real estate taxes).

·    No depreciation deduction or later recapture on sale of the home is allowed if the “safe harbor method” is used.

·    Of course, even under the simplified method, it is the taxpayer’s responsibility to ensure  good records which prove the exclusive use of the home office continue to be maintained to substantiate the claim.

This deduction is an alternative to the calculation, allocation and substantiation of actual expenses required under the IRS code section 280A.  If the deduction is greater using the 280A method you can still use that method.  Taxpayers are allowed to change their treatment from year to year.