I&U CPA LLC

Year-End Tax Strategies

Income Deferral/Acceleration:

▪ Enter into/Sell installment contracts

▪ Defer/Receive bonuses before January

▪ Hold/Sell appreciated assets

▪ Accelerate income to use available carryforward losses

▪ Hold/Redeem U.S. Savings Bonds

▪ Accumulate/Declare special dividend

▪ Postpone/Complete Roth conversions

▪ Delay/Accelerate debt forgiveness income

▪ Minimize/Maximize retirement distributions

▪ Delay/Accelerate billable services

▪ Structure/Avoid mandatory like-kind exchange treatment

Deductions and Credits Acceleration/Deferral:

▪ Bunch itemized deductions into 2014 and take standard deduction in 2015/reverse steps

▪ Pay bills in 2014/postpone payments until 2015

▪ Pay last state estimated tax installment in 2014/delay payment until 2015

▪ Accelerate economic performance/postpone performance

▪ Watch AGI limitations on deductions/credits

▪ Watch net investment interest restrictions

▪ Match passive activity income and losses

Year-End Individual Planning:

For individuals, the income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. The top tax rate for qualified capital gains and dividends is also unchanged from 2013: 20 percent.

STRATEGY: Year-end planning should look to avoiding spikes in income, whether capital gains or other income, which for higher-income taxpayers may push capital gains into either the 39.6 percent bracket for short-term gains or the 20 percent capital gains bracket for longterm gains. Spreading the recognition of certain income between 2014 and 2015 may accomplish this goal.

Net Investment Income (NII) Tax:

Since 2013, taxpayers with qualifying income are liable for the 3.8 percent net investment income (NII) tax. The threshold amounts for the NII tax are:

▪ $250,000 in the case of joint returns or a surviving spouse,

▪ $125,000 in the case of a married taxpayer filing a separate return, and

▪ $200,000 in any other case.

STRATEGY: All net investment income should be monitored for exposure to the NII tax. Net investment income is more than simply capital gains and dividends. It also includes income from a business in which the taxpayer is a passive participant. Rental income may also be considered NII unless earned by a real estate professional.

STRATEGY: Taxpayers with potential NII liability should consider keeping income below the $250,000/$125,000/$200,000 thresholds if possible by spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions.

Additional Medicare Tax:

The Additional Medicare Tax increases the employee share of Medicare tax by an additional 0.9 percent of covered wages in excess of certain threshold amounts. The tax also increases Medicare tax on self-employment income by an additional 0.9 percent of selfemployment income in excess of the threshold amounts. The threshold amounts are: $200,000 for single individuals (and heads of household); $250,000 for married couples filing a joint return; and $125,000 for married individuals filing separate returns.

STRATEGY: This is now the second year in which affected taxpayers will file returns reflecting Additional Medicare Tax. Taxpayers who only now realize that they have had insufficient income tax withholding may request that their employer(s) take out an additional amount of income tax withholding, which would be applied against taxes shown on the taxpayer’s individual income tax return, including any Additional Medicare Tax liability. Taxpayers may also consider making estimated tax payments.

Alternative Minimum Tax:

The alternative minimum tax (AMT) is now permanently “patched.” The patch provides for increased exemption amounts and allows taxpayers to take all of the nonrefundable personal credits against regular and AMT liability.

STRATEGY: Even with the permanent patch, taxpayers should continue to review their AMT liability versus regular tax liability. For some taxpayers, AMT liability and regular tax liability may be roughly equal from year to year. Other taxpayers may find that they have had significant fluctuations in income or AMT-targeted tax benefits from year to year and could explore the benefit from being able to shift some AMT-triggering items from an AMT year to a non-AMT year.

Pease Limitation/PEP:

The Pease limitation reduces the total amount of a higher-income taxpayer’s otherwise allowable itemized deductions by three percent of the amount by which the taxpayer’s adjusted gross income exceeds an applicable threshold. However, the amount of itemized deductions is not reduced by more than 80 percent. Taxpayers who find themselves within threshold adjusted gross income amounts that make them subject to the Pease Limitation will also need to plan for the revived personal exemption phaseout (PEP).

Affordable Care Act:

Effective January 1, 2014, the PPACA requires individuals, unless exempt, to carry minimum essential health insurance coverage for each month or make an individual shared responsibility payment. Individuals liable for a shared responsibility payment during 2014 will make their payment when they file their 2014 returns. Individuals who obtain health insurance coverage through the PPACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit to help offset the cost of coverage. 2014 was the first year that the Code Sec. 36B credit was available.

PLANNING: Taxpayers who elect to receive advance payments of the Code Sec. 36B credit must reconcile on their returns the amount forwarded to insurers with the credit they may claim.

Year-End Retirement Strategies:

Generally, all types of qualified plans (as well as traditional individual retirement accounts) must satisfy a required minimum distribution (RMD) in which distribution of an employee’s or IRA owner’s interest in the plan or IRA must begin by the “required beginning date.”

PLANNING: Two year-end deadlines should be kept in mind: (1) The RMD for any given year is based on the retirement account balance on December 31 of the calendar year immediately before the year of distribution; and (2) The RMD for any year generally must take place by December 31 of that year. The interplay of these two deadlines will reach increasing importance as baby boomers begin to retire, and to do so with fewer pensions and a greater number of retirement account balances to manage.

In Bobrow, TC Memo. 2014-21, the Tax Court held that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained. The one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer, the court found.

PLANNING: The Bobrow decision affects only IRA to IRA rollovers managed by the account holders, and does not limit trustee-to-trustee transfers. For planning purposes, the pre-Bobrow rule will continue to apply to IRA distributions occurring before January 1, 2015.

Estate and Gift Taxes:

The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5 million exclusion for gifts made and estates of decedents dying after December 31, 2012. The gift tax exclusion allows taxpayers to give up to an inflation-adjusted $14,000 to any individual, gift-tax free and without counting the amount of the gift toward the lifetime $5 million exclusion, adjusted for inflation.

PLANNING: The applicable exclusion amount, as adjusted for inflation, is $5,340,000 for gifts made and estates of decedents dying in 2014 and rises to $5,430,000 in 2015.

PLANNING: There is no limit on the number of individual donees to whom gifts may be made under the $14,000 exclusion. Spouses may “split” their gifts to each donee, effectively raising the per donee annual maximum exclusion to $28,000. Spouses may give an unlimited amount of gifts to one another without any gift tax imposed.

Life Cycle Changes Important to Year-End Strategies:

In addition to changes in the tax law, year-end tax strategies should also consider personal circumstances that changed during 2014 as well as what may change in 2015. These “life cycle” events include:

▪ Change in filing status: marriage, divorce, death or head of household changes

▪ Birth of a child

▪ Child no longer young enough for child credit

▪ Child who has outgrown the “kiddie” tax

▪ Casualty losses

▪ Changes in medical expenses

▪ Moving/relocation

▪ College and other tuition expenses

▪ Employment changes

▪ Retirement

▪ Personal bankruptcy

▪ Large inheritance

▪ Business successes or failures

Questions? Contact our New York office for more information. We are happy to help.

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Any accounting, business, or tax advice contained in this page is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.