2014 Year-End Tax Considerations
October 27, 2014 

     Year-end planning will be more challenging than normal this year.  A number of popular deductions expired at the end of 2013 and will not be available for 2014.  In this issue we will cover some of the more common deductions that will no longer be available or have been significantly modified.  We will also provide a few tax-saving ideas to get you started.

   Expiration of Deductions

 

    There are a number of popular deductions that expired at the end of 2013 and will NOT be available for the 2014 tax year.  Congress could pass an extension for some or all of these provisions, as they have done in the past.  However, nothing is finalized as of right now.  Which actions Congress will take remains to be seen and may depend on the outcome of the elections.  Listed below are some of the more common provisions that have expired or have been modified significantly.

Section 179 Deduction - Allows for the immediate write-off of certain qualified assets.  The maximum Section 179 deduction for 2014 will be $25,000, down from $500,000 in 2013.

Bonus Depreciation - Allowed for the immediate write-off of 50% of the cost of qualified assets.  This provision expired at the end of 2013.

 

Depreciation of Qualified Leasehold Improvements -Qualified leasehold improvement property was able to be depreciated over 15 years.  This provision expired at the end of 2013 - Qualified leasehold improvements are now depreciated over 39 years. 

 

State & Local Sales Tax Deduction -  As an itemized deduction, the taxpayer has had the option to deduct state & local sales tax in lieu of state & local income tax.  This write-off is used mostly by taxpayers in states without an individual income tax, such as Wyoming, Texas and Florida.  This provision expired at the end of 2013.

  

Tuition Deduction - An above-the-line deduction allowed for an individual taxpayer's qualified tuition and related expenses.  This provision expired at the end of 2013.

 

Educator Expenses - A taxpayer that is an eligible educator was allowed an above-the-line deduction up to $250 for expenses paid for books, supplies, and other materials used by the taxpayer in the classroom.  This provision expired at the end of 2013.

 

IRA Qualified Charitable Distributions (QCD) - For taxpayers age 70 ½ and older, a Qualified Charitable Distribution will not be allowed for up to $100,000 per individual this year.

Tax-Saving Ideas

 

      Effective tax planning requires considering both this year and next year - at a minimum.  Without a multi-year outlook, you can't be sure that maneuvers intended to save taxes on your 2014 return won't backfire and cost additional money in the future.

      Also, you should consider the Alternative Minimum Tax (AMT) in your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. 

      Listed below are some ideas to consider:

Increase "Above-the-Line" Deductions -  Many tax credits are subject to Adjusted Gross Income (AGI)-based phase-outs, meaning only taxpayers with AGI below certain thresholds can benefit.  You can effectively reduce your AGI by increasing "above-the-line" deductions.  These deductions include Health Savings Accounts and Retirement Plan contributions.  Increasing your Retirement Plan contributions and your HSA contribution can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for married filing joint returns ($200,000 for single).

Consider Deferring Income - For sales of property, consider an installment sale that shifts part of the gain to later years, or use a like-kind exchange that defers the gain until the exchanged property is sold.  If you own a cash-basis business, delay billings so payments aren't received until 2015, or accelerate payment of certain expenses.

Check Partnership & S-Corporation Stock Basis -

If you own an interest in a partnership or S-Corporation, your ability to deduct any losses it passes through is limited to your basis.  If you expect the entity to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution before year-end.

   

Avoid the Hobby Loss Rules - Many small business may end up showing a loss for the year.  The IRS can deem that certain business losses are considered "Hobby Losses", and consequently non-deductible.  Thus, if your business is expecting a loss this year, we should talk before year-end to make sure we do everything possible to maximize the tax benefit of the loss.

Charitable Giving - Consider using a credit card.  Donations charged to a credit card are deductible in the year charged, not when payment is made on the card.  Charging donations to your credit card before year-end enables you to increase your 2014 charitable donations deduction even if you're temporarily short on cash. 

Harvest Capital Losses - Review your securities portfolio for any losers that can be sold before year-end to offset any gains you have already recognized this year.  As always only sell such stock losers if it makes economic sense.

Maximize Contributions to 401(4) Plans - If you have a 401(k) plan at work, contribute as much as you can, especially if your employer/company makes matching contributions.

Federal Income Tax Withholding - If it looks like you are going to owe income taxes for 2014, consider increasing the federal income taxes withheld from your paychecks now through the end of the year.  

Flex Spending Accounts (FSAs) - If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2015 salary to convert into tax-free contributions to the plan.  You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs.  Keep in mind that FSAs are "use-it-or-lose-it" accounts - only set aside what you'll likely have in qualifying expenses for the year.

Required Retirement Distributions - If you have reached the age of 70 ½, the law generally requires individuals to take withdrawals from their retirement accounts based on their age and size of their accounts.  This is known as the "Required Minimum Distribution", or RMD.  Failure to take the RMD can result in a penalty of 50% of the amount not withdrawn.  If you turned 70 ½ in 2014, you can delay your 2014 RMD to 2015, if you choose.  However, by doing this, it will result in two distributions for 2015 - the RMD for 2014 and the RMD for 2015 which may put you in a higher tax bracket.

    Through careful planning, it is possible your 2014 tax liability can still be reduced, but don't delay.  The longer you wait, the less likely it is that you'll be able to achieve a meaningful reduction.  The ideas discussed in this letter are a good way to get you started with year-end planning, but they're no substitute for personalized professional assistance.  Please feel free to contact us with any questions you may have regarding the information above, or if there is another way we can serve you.   
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Soukup, Bush & Associates, P.C.
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