- For 2014, capital gains and qualified dividends are taxed at 20% for taxpayers whose ordinary income rate is 39.6%. The tax rate is 15% for taxpayers whose ordinary income rate is 25% to 35%. For taxpayers with lower ordinary income tax rates, capital gains and qualified dividends are not taxed. Add 3.8% to these rates for the Medicare surtax for income above $250,000 MFJ, $125,000 MFS, and $200,000 all other filing statuses.
- The individual income tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.5%.
- Taxpayers whose income is subject to high tax brackets should consider investing money in municipal bonds to obtain tax-free investment income.
- The type of mutual fund to invest in depends on the taxpayer's investment objective, whether seeking long-term growth or current income. Use growth funds for taxpayers seeking long-term growth. Use funds that pay dividends for taxpayera seeking current income.
- Before purchasing mutual fund shares, taxpayers need to be aware of any upcoming distributions the fund is anticipating to avoid the unintentional purchase of a capital gain distribution. Timing a mutual fund sale can take advantage of more favorable long-term capital gain rates verses ordinary tax rates on the sale of short-term mutual fund shares.
SAVING FOR COLLEGE:
Planning for Tax Law Changes
- The Coverdell education savings account contribution limit and phase-out range for MFJ is scheduled to be reduced after 2014.
- The provision that increased the amount of the Hope/American Opportunity credit remains the same in 2014.
- The tuition and fees deduction remains the same in 2014.
- Kiddie tax is avoided by investing in mutual funds, securities, and other capital gain-producing property that pays little or no dividends.
- Rather than transfer money into a child's account which may be subject to kiddie tax, consider the benefits of using a 529 plan (Qualified Tuition Plan) or ESA (Coverdell Education Savings Account).
- The standard mileage rate for volunteer charitable miles is $0.14 per mile.
- Instead of the standard mileage rate, the taxpayer can deduct actual expenses for use of the taxpayer's vehicle for volunteer charitable work, including gas and oil only, not insurance, maintenance, depreciation, etc.
- Travel expenses for doing volunteer work include meals and lodging, deductible at 100%.
- Deduct out-of-pocket volunteer work as a cash contribution - not a noncash contribution.
- A donation of $250 or more to any single charity in one day requires an acknowledgement statement from the charity, including out-of-pocket expenses for volunteer work.
- No deduction is allowed for the time spent by an individual doing volunteer charitable work or for allowing a charity to use property owned by the taxpayer.
Tax Law Changes
- As of now, the fo;;owing provisions have expired and not been extended: Charitable contributions of IRA distributions, Charitable contributions of food inventory, Conservation contribution increase in AGI limitations.
- Verify that an organization is a qualified charitable organization.
- Establish a verifiable relationship with the charitable organization, keep a detailed record of all expenditures incurred, and obtain a proper and timely acknowledgement from the charity of each expenditure of $250 or more for all out-of-pocket volunteer expenses for deductions.
- Turn a charitable contribution (subject to various limitations) into a business advertising expense by structuring the contribution as an expenditure for the purchase of advertising space.
- Rather than take an IRA deduction and donate to charity, have the IRA trustee directly pay the IRA distribution to the eligible charitable organization.
- Make a charity the beneficiary of an IRA. An IRA or other retirement asset is included in the taxpayer's gross estate for estate tax purposes. The IRA is also taxable income to the recipient. If an IRA is paid to a charity, the IRA is not subject to either estate or income tax.
- Transfer property to a charitable remainder trust. A charitable remainder trust allows a taxpayer to give an appreciated asset to charity while keeping an income stream. The taxpayer receives a current income tax deduction.
MARRIAGE AND DIVORCE:
Tax Law Changes
NOTE: The AMERICAN TAX RELIEF ACT of 2012 extended the relief for married taxpayers, the expanded credit for taxpayers with three or more qualified children and other provisions to December 31, 2017.
- Taxpayers going through a divorce should consider the tax benefits of filing a joint return versus the non-tax reasons for filing separate returns.
- Separating couples should consider the tax advantages that go along with custody of children, regarding the EIC and the dependency deductions.
- Couples who are not separated or planning a divorce may still benefit from Married Filing Separately.
- Two individuals making roughly the same amount of money may actually benefit under the tax code by not getting married, in a situation when dependents are involved due to the HOH filing status and the earned income credit.
HOME OWNERSHIP AND REAL ESTATE:
Tax Law Changes
- The provision allowing a mortgage interest deduction for mortgage insurance premiums is scheduled to expire after 2014.
- Buying a home late in the year may not generate enough tax deductions in year one to itemize.
- Taxpayers can use a reverse mortgage to generate tax-free income by converting equity built up inside their home into cash.
- Taxpayers can use a reverse mortgage to pay off an existing home.
- If a child purchases the home from a parent, and then rents it back to the parent at fair rental value, the child may benefit from tax breaks that the parent might no longer benefit from, plus the parent also benefits by converting equity locked up inside the house into cash.
Tax Law Changes
- The provision that reduced the Social Security portion of FICA for an employee from 6.2% to 4.2% is now expired.
- The provision that allows educators to deduct up to $250 for out-of-pocket classroom expenses is scheduled to expire after 2014.
- The high-low method for substantiation of travel expenses is no longer allowed.
- If an employee incurs business expenses that are not going to be reimbursed by the employer, the employee should get a written statement from the employer that says the employer will not reimburse a particular type of (or any) expense incurred by the employee.
- Some unreimbursed employee business expenses are not deductible if the employee does not have documentary evidence, such as recorded business mileage.
- Transportation from home to a temporary work location may be deductible if the taxpayer has a regular place of business. Running job related errands should be done coming to or going home from work to increase the business miles eligible for a deduction.
Tax Law Changes
- The provision that allowed the self-employed health insurance deduction to offset income subject to self-employed tax expired at the end of 2014.
- A sole proprietor can deduct the cost of his or her health care directly on Schedule C or F by hiring his or her spouse to work in the family business.
- A parent who owns a family business can hire his or her child to work for the business and shift income from the parent over to the child at a lower tax rate.
- Running a family business out of a qualified home office can turn nondeductible housing expenses into legitimate business deductions. A qualified home office can also turn nondeductible commuting expenses into deductible business mileage.
Tax Law Changes
- In 2014, the standard business mileage rate is 56.0 cents. In 2015, the standard business mileage rate is 57.5 cents.
- The buyer of a business should purchase the assets of the business rather than stock in the corporation.
- Business owners should consider the benefits of a buy-sell agreement as part of a succession plan.
- Business owners can expense costs classified as repairs versus capitalizing improvements to business property by making the necessary repairs at a separate time than when renovations are being made, make repairs while the property is being rented, and by using comparable materials instead of more expensive materials that may prolong the life of the property.
- When a business expense is paid with personal funds, employees, shareholders, and partners should seek reimbursement through an accountable plan.
- A taxpayer who wants to turn a vacation into a deductible business trip should plan the trip so that the number of business days is more than the number of personal days.
- To avoid confusion as to independent contractor status, a business can seek to hire independent contractors who have incorporated their own business rather than operate as a sole proprietor or partnership, or by leasing employees from an outside company, such as a temporary agency.
- Taxpayers can convert start-up costs that must be capitalized into current operating deductions by planning for an earliest possible business start date.
Tax Law Changes
- Additional Medicare tax of 0.9%n wages (including taxable employee benefits) paid to an employee i9n excess of $200,000 in a calendar year must be withheld from the employee. Additional Medicare tax is only emposed on the employee. There is no corresponding employer share of the tax.
- The Small Business Health Care Tax Credit increases to 50% (35% for tax-exempt small employers) effective beginning January 1, 2014.
- Rather than pay all wages to employees in the form of money, offer excludable fringe benefits to employees, benefiting both the employer and employee.
- A self-employed individual could choose to incorporate the business and treat himself or herself as an employee of the corporation.
- Employers can reduce their fixed health insurance premium cost by utilizing an HSA.
- Employee stock options are designed to compensate employees with tax-deferred income, and in some cases, convert ordinary income from compensation into capital gain income, taxed at a lower rate.
- Employee stock options can give an employee a productivity incentive in the form of a stake in the business.
SAVING FOR RETIREMENT:
- Qualified retirement plans provide for a current year tax deduction. Earnings frow tax-free while they remain inside the plan.
- Defined contribution plans allow employers the ability to provide retirement benefits to employees without guaranteeing the amount payable at retirement. Thus, the only cost to the employer is the initial contribution.
- Defined benefit plans predetermine payouts that an employee is entitled to upon retirement.
- Elective deferrals through 401(k) type plans allow the participants to decide how much compensation they want contributed to the plan on a pre-tax basis.
- IRAs, SEP IRAs, and SIMPLE IRAs are retirement plans that avoid the complex rules, red tape, and expensive administration costs that apply to qualified retirement plans.
- An employer that does not want to adopt a formal retirement plan can allow its employees to contribute to an IRA through payroll deductions.
- Self-employed taxpayers should consider the benefits of a solo 401(k) plan.
- Low-income taxpayers should consider pulling money out of traditional IRAs or converting to a Roth IRA tax free to take advantage of the unused zero percent tax bracket or the lower 10% tax bracket.
ESTATES AND TRUSTS:
Tax Law Changes
- The lifetime estate and gift tax exclusion is $5,340,000 for 2014.
- The top estate tax rate is 40%.
- The annual gift exclusion is $14,000 per person in 2014.
***Income Tax on Inherited Assets***
- Invest income paid after death.
- Employer payments-wages, salaries, bonuses, commissions, vacation pay, sick pay.
- IRAs (except nondeductible contributions) and SEPs.
- Qualified pension plans, profit-sharing plans, deferred compensation.
- Annuities (except decedent’s investment in the contract).
- Accrued interest on Series EE and I bonds unless the decedent paid tax annually.
- The gross profit percentage of a contract for deed or other installment sale.
- Accounts receivable, partnership interests, S corporation earnings.
- Life insurance proceeds.
- Cash, bank accounts, certificates of deposit (not to exceed $5,340,000 in 2014).
- Stocks, bonds, mutual funds (basis changes to FMV at death).
- House, cabin, other real estate (basis changes to FMV at death).
- Cars, vehicles, household goods, jewelry, other personal property (basis changes to FMV at death).
- Roth IRA held more than five tax years.
- Payment from a probate estate of a sum of money or other property specifically described in a will.
Inherited assets. These rules apply to property acquired from a decedent, including assets that pass through probate, assets in a decedent's revocable trust, and assets inherited directly by joint tenants and designed beneficiaries. These rules do not apply if a gift of the asset was completed before death.
Bankruptcy creditors cannot grab inherited IRAs. In the court's opinion, the exemption for IRAs from bankruptcy creditors is available not just to the person who set up the account, but also to the individual who inherited it.
- A state's intestacy laws are, in effect, an estate plan.
- Health care directives allow patients to give instructions about health care and choose agents to make decisions when they cannot do so.
- Making gifts during life, rather than passing the entire estate at death, can reduce estate tax. Clients who may require Medicaid, particularly married couples, should consult a lawyer before making gifts.
- Consider the benefits of using life insurance to generate liquidity for the heirs of an estate.
- A taxpayer can correct the errors of another person's estate plan (or lack of one) by disclaiming all or part of an inheritance, allowing it to pass on to the next beneficiary.
- Married couples can make use of the estate tax exemptions of both spouses by passing some assets to beneficiaries other than the surviving spouse at the death of the first spouse.
- A disclaimer trust is a variation of a credit shelter trust.
- Revocable trusts (or living trusts) are used to avoid probate.
- Joint ownership and beneficiary designations are inexpensive probate alternatives.
Tax Law Changes
- The nonbusiness energy property credit for exterior doors, windows, insulation, heat resistant roofs, heat pumps, central air conditioners, water heaters, stoves using biomass fuel, furnaces, and advanced main circulating fans is scheduled to expire at the end of 2014.
- The residential energy efficient property credit for solar water heating, solar electric power, small wind systems, geothermal heat pumps, and fuel cells is scheduled to expire at the end of 2016.
- The plug-in electric drive vehicle credit is scheduled to expire at the end of 2013.
- The energy efficient home credit for construction contractors is scheduled at the end of 2014.
- The advanced lean burn technology motor vehicle credit and the qualified hybrid motor vehicle credit expired at the end of 2010.
- The maximum amount of the child tax credit and the child and dependent care expense credit is schedule to come before Congress in 2015..
- The provision that excludes nontaxable income such as 401(k) contributions from the earned income credit calculation is scheduled to expire after 2014.
- The provision that increases the earned income credit for qualifying taxpayers with three or more children was extended to December 31, 2017.
- A taxpayer may be influenced to purchase an energy efficient vehicle have expired, except for the tax credit for new qualified fuel cell motor vehicles and the tax credit for new qualified plug-in electric drive motor vehicles.
- A taxpayer may be influenced to make energy efficient improvements to real estate that qualify for a tax credit.
- A taxpayer may have non-tax incentives for going green that may be more tempting with the added incentive of a tax credit for purchasing energy efficient property.
- Taxpayers who are retired and earn taxable income from investments and retirement distributions should consider moving to a low-tax or no-tax state.
- A taxpayer working in a foreign country may qualify to exclude a portion or all of his or her earnings from taxable income.
- The decision as to when is the best time to start collecting Social Security benefits depends on a number of factors.
- There are a number of ways to retire early and take distributions out of a 401(k) or IRA prior to the age of 59 1/2 without incurring an early distribution penalty. The main one is a 72(t)(A)(iv) distribution.
- Going to work and putting a child in day care versus staying at home to raise the child depends on the earning potential of the parent that would potentially stay at home with the child.