Year-End Tax Planning: Things to Consider Prior to Year End
December 5, 2014 Tax Advisor

As  year-end approaches, it is a good time to consider any tax planning strategies you can make to minimize your taxes – on both your 2014 and future years’ returns.  We have outlined some approaches you can make both as an individual and as a business owner.

Keep in mind year-end tax planning consists of more than just projecting your tax liability, it is projecting your taxable income and then looking for ways to lower it, either by lowering your gross income or increasing your itemized deductions and credits. This is especially true if your projected tax rate is going to be roughly the same or lower in 2015 than it will be in 2014.  On the other hand, if you know that your 2015 income will be much higher than 2014 (for example, you are going to get promoted in 2015), then you may want to postpone deductions so that you will have them to offset a higher rate of tax.

For most people, it is more beneficial to postpone income and increase deductions, as this will also postpone the taxes due.

Listed below are several ways to postpone income:

  • Year-end bonus and commissions – if it is economically feasible, try to defer receiving your year-end bonus and/or commission until January 2015.
  • Contribute money into an IRA or a spousal IRA if you are able to.
  • If you have self-employment income, consider contributing money into a Simplified Employee Pension (SEP) plan. Depending on your income, you can put away up to $52,000 for 2014.  The SEP contribution does not need to be funded until the due date of your tax return, including extensions.
  • If you have a high-deductible insurance plan, you may be able to fund a Health Savings Account. With family coverage you can place $6,550 into your HSA.  Someone with individual coverage can fund $3,300. There is also an additional $1,000 catch-up for those over 55.
  • If you have large capital gains in 2014, consider selling some stocks that have capital losses to help offset some of the gains.
  • Increase your participation in a passive entity to avoid having to pay the Medicare 3.8% surtax on your income from that entity. The basic test to be considered non-passive is working 500 hours or more in that entity.
  • If you are worried about your social security benefits being taxable, you may want to consider taking money out of a ROTH IRA or investment account as opposed to taking out additional money from your traditional IRA account. You will still need to take out your required minimum distribution if you are over 70 ½ years of age.
  • For those age 70 ½ and taking required minimum distributions, use a qualified charitable contribution deduction.  (Note: this has not yet been made law, but is expected to be part of the annual tax extender package.) Typically, IRA owners and beneficiaries who have reached age 70 ½ are permitted to make cash donations totaling up to $100,000 to Qualified Distribution Charities (QDCs). You lose the charitable deduction, but get a better trade-off of having your Adjusted Gross Income reduced by the amount of the contribution. This is especially helpful to Ohio residents.

 

Remember that postponing income is only half of the battle.  You should also accelerate deductions by doing one or more of the following:

  • Pre-pay your estimated state and local tax liability in December 2014 instead of April 2015. You can also pre-pay any real estate taxes. However, if you are subject to the Alternative Minimum Tax (AMT) this will not help as state, local and real estate taxes are not allowed as a deduction in determining your AMT income.
  • Pre-pay your January mortgage payment, which will accelerate the mortgage interest deduction.
  • Increase your charitable contributions – especially if you were already planning on making some of the charitable deductions in January 2015. If you mail them out on December 31, 2014, you will still get a 2014 charitable deduction even if the check doesn’t clear your bank account until 2015. You can also make and deduct charitable contributions made via credit card in December 2014 even if you don’t pay the credit card bill until January 2015.
  • If you have enough medical expenses to get over the 10% of gross income threshold (7.5% if you are 65 or older), pay medical bills in December that you normally would pay in January. This also works for pharmacy prescriptions-you can re-fill your January medications in December.

 

Other helpful ideas:

  • If you are going to be subject to the AMT in 2014, avoid exercising incentive stock options.
  • Consider accelerating tax credits such as the American Opportunity Credit (an education credit). If you receive a tuition invoice for spring 2015, pay it in December 2014 so you will be eligible for the maximum credit of $2,500 per student. (Note: The AOC phases out for married taxpayers with Adjusted Gross Income > $180,000.)
  • Consider donating appreciated stock to charity instead of giving a cash contribution.  The benefit for this is that you still get to deduct the fair market value of the stock but you will not have to pay tax on the capital gains. Since charitable organizations don’t pay income tax, the gain on the sale of the stock will not incur any taxes.
  • Does your business have export sales? Consider utilizing an IC-DISC.  With this technique a portion of income related to foreign sales can be taxed at the long-term capital gains tax rate.
  • Take advantage of the InvestOhio Program. If you are considering an equity investment in an Ohio company, this program may allow you an Ohio tax credit up to 10% of your investment.

 

Other tax news we are paying attention to:

  • The Ohio Small Business Deduction was new in 2013 and allowed small business owners to deduct 50% of their first $250,000 of income from small businesses (or $125,000 if you are single). For 2014 only, this deduction bumps up to 75% of the first $250,000.
  • For several years, favorable bonus depreciation and Section 179 depreciation rules have been in play. These taxpayer-friendly rules expired in 2013.  There have been some discussions in Washington that similar rules will be reinstated prior to the end of 2014.
  • The Ohio municipal tax system is complex and is further complicated by the lack of conformity between the municipalities.  A proposed law, Ohio House Bill 5, makes progress in eliminating some of the differences between the municipalities, as it seeks to simplify the municipal income tax code.
  • We are expecting even less cooperation from the IRS in the upcoming tax season.  Congress continues to ask the IRS to do more with less, passing more tax laws while also reducing their budget. Both the IRS Commissioner John Koskinen and National Taxpayer Advocate Nina Olson have pointed to a more aggravating tax season. For example, Koskinen estimated that 47 percent of taxpayer phone calls to the IRS might go unanswered in 2015, up a stunning 18 percent from 2014.
  • Congress still has a wide range of tax provisions that expired December 31, 2013 that have not been renewed yet.  As we have done in the past, we will continue to monitor these Congressional actions and will be sure to share any updates as they become available.

 

This letter is intended to give you just a few ideas to get you thinking about tax planning moves for the rest of this year.  Please don’t hesitate to contact us if you would like more details or to schedule a tax planning strategy session.

About the Authors

Cindy H. Mitchell
Cindy H. Mitchell
CPA
Director, Taxation Services

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