2014 Year-End Tax Planning Letter

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Dear Clients and Friends:

As always, thank you for trusting us with your taxes. If you are new to us, we can only promise to treat your taxes – and finances – as our own. That’s why we don’t let anything out of the office that hasn’t been prepared and reviewed multiple times – to make sure you pay the least amount of tax – legally. Our commitment to you includes updating you on things you should know and consider doing before the end of 2014 to save on taxes, and some ideas for 2015. According to our records, @ 95% of self-prepared returns have errors in them, and over 70% of other tax preparers returns have errors; not one of our tax returns has been returned by the IRS in the last 3 years.

Executive Summary
Part 1: Overview of Tax Changes in 2014
Part 2: Tax Planning and Savings Ideas for You
Part 3: Tax Planning and Savings Ideas for Your Business
Part 4: Tax Planning and Savings Ideas for Your Investments

Part 1: Overview of Tax Changes in 2014

Not much new happened re taxes in 2014, which is good as so many changes occurred in the last few years due to ObamaCare that continue to hurt you, the taxpayer.

As things stand now, certain favorable tax law deductions and savings technically expired after 2013, or were been curtailed for 2014. Some of these you may be familiar with related to: the sales tax deduction; energy credits; teacher out-of-pocket deductions; forgiveness of debt when someone loses their home; deductions for qualified tuition expenditures; deduction for state and local general sales taxes – and the all-important three-year depreciation for race horses two years old or younger. Those and 55 others are on the table for reinstatement by Congress.

If Congress takes action – and if we think what they do will affect you negatively – we will contact you via email (or snail mail if you don’t have email).

Unfortunately, we are still being haunted by previous year tax actions taken by congress:

First, ObamaCare added several key tax provisions for individuals and employers, including a new 3.8% surtax affecting many investors. Many of our clients paid thousands of dollars of additional tax this past year due to this provision. If this affected you, we told you about it.

The “American Taxpayer Relief Act of 2012 (ATRA)” raised tax rates, reduced itemized deductions and personal exemptions for high-income taxpayers, and established permanent parameters for estate-and gift-tax planning, among other changes. Although all of this tax legislation happened years ago, it still affects you today, which we will discuss. This “relief” act has also cost many of our clients thousands of their hard-earned dollars. And these are not “rich” people, as portrayed in the main-stream media, but hard-working folks like you, who have lost their exemptions, itemized deductions, seen tax rates skyrocket and have lost tuition credits – because they were too successful for the folks writing our tax laws (politicians).



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Watch Out – Here Comes the Obamacare Taxes

Expect you-know-what to break lose when your fellow citizens get their tax returns done for 2014 in the New Year.
Millions of Americans can look forward to figuring in Obamacare health insurance expenditures on a month-by-month basis into their 1040 tax return. If you were covered in 2014 by a qualified health insurance plan at work (for the whole year), this really won’t affect you except to add additional schedules and time to your tax return. BUT – if you did not have Obamacare health insurance, did not have other qualified health insurance (such as one of the Christian Health Sharing Ministries), or if there are conflicts between your records and Uncle Sam’s – watch out.

Come January, hopefully, you will receive a statement (1095-A) from the federal government telling you what months you were covered according to their records for qualified health insurance or Obamacare. Unfortunately, the federal government has so much data to process, and this being the first year of this situation, it would be fair to plan for some mistakes on their part.
You see – on a month-by-month basis, if you were not covered according to the dictates of Uncle Sam – you will be penalized accordingly. The first year isn’t horrific (you would have just spent the money on luxuries like your retirement, your kid’s college tuition, or the car you need to replace), but the second and third years really will hurt the middle class taxpayer.

Obamacare Taxes at Work

Let’s take a look at how the ObamaCare penalty will affect the Schlamiel family. Because they don’t have health insurance from their job, they looked to the ObamaCare “exchange” in their city. For a family of two adults and two kids, their premiums were going to increase 78% over their existing individual health insurance plan they were promised they could keep. On $70,000 a year salary, there simply wasn’t enough money to buy ObamaCare. So, like many of their fellow citizens, they do not have health insurance as they certainly don’t qualify for Medicaid, either.

Because they don’t have ObamaCare approved insurance, they will be penalized $497 in 2014, according to healthinsurance.org. In 2015, that penalty doubles (!) to $988. Hold on to your seat – in 2016 that penalty doubles again to $2,085! That may not be a lot of money to you, but taking away $2,085 from parents raising two kids is a horrendous burden. These penalties will show up on the Sclamiel’s 1040 tax returns from 2014 forward.



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Part 2: Tax Planning and Savings Ideas for You

Be aware that the tax-planning concepts discussed within this letter are intended only to provide an overview. We suggest that you review any of these with us or a tax attorney.

Here are some ideas to lower your 2014 taxes before the end of the year:

Maximize your 401 (k) and IRA contributions immediately!

If you are tired of overpaying taxes, maximize your 401(k) plan contributions by year-end to boost retirement savings. The maximum contribution for 2014 is $17,500 ($23,000 if you are 50 or older).

Example: If you are in the 28% tax bracket (meaning the last dollar is taxed at that rate – not unusual for our clients) you will save 28 cents in taxes for every dollar you sock away in your 401k plan!

Forget what the employer matches! That’s great, but if you are putting away $5,000 because they match that amount, you are losing on the tax savings of $3,500 if you do not contribute up to the maximum deferral of $17,500 ($23,000 if age 50 or older).
Note: this money is not lost or untouchable; if you must get your hands on it, you can borrow against your plan without incurring negative tax consequences (penalties and taxes) unless you leave your job. I do not recommend borrowing against one’s 401(k) as a matter of course, but you can get your hands on it without paying taxes. Note: If you leave your job with unpaid loans against your 401K, the loan amount becomes immediately taxable.

Here’s another huge benefit of a “deferred compensation” plan: the money you invest grows tax free until you take it out. Your money can grow exponentially if you aren’t paying tax on the growth as time progresses.

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Roth 401K’s versus Traditional 401K’s

We get lots of questions about how one should contribute to their 401K: should it be the traditional contribution, or a Roth contribution?

A “traditional” contribution is one where you are getting a tax break on what you invest in the plan (see above example). Yes – you get a beautiful tax deduction by investing in your traditional 401K, but you will pay income tax on it when you take it out. A “Roth” contribution gets you NO TAX ADVANTAGE when you contribute (you don’t save any taxes), but you will not pay tax when you remove the money.

So – what should you do? We have seen numerous studies where comparisons are made between these two options. And… nothing we have seen definitively says do one or the other to maximize your tax savings and investments. Thus, many taxpayers split their 401K contributions if they would like to contribute to a “Roth” plan and then save taxes by putting some money in a “Traditional” plan.

What about IRA’s?

Similarly, you need to max out your IRA up to $5,500 (add $1,000 if over 50). And, if you are employed, you can open a spousal IRA for your honey with the same benefits and limits up to $5,500 (add $1,000 if over 50). You have until April 15, 2015 to open and IRA for 2014. Note: There are very important limitations on investing in IRA’s if you are already covered by a qualified plan at work (a 401K, 403B, etc). Contact us first to make sure you qualify.

What is Truly Important?

It is vital that you save for your retirement! Many of our clients are Dave Ramsey fans, so you should know how he feels about spending money unnecessarily.



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Do you really need a brand new car? This is Florida! There is no snow or cold weather starts to destroy your engine. Where are the potholes and rust that destroy an auto? Theoretically, if you take care of your car with regular maintenance, use synthetic oil and fluids, it should last 300,000 to 400,000 miles. The time to get rid of a car is when it is unfixable, unreliable, you outgrow it, or the cost of repairs is greater than buying a replacement. BUT! A low-mileage, used car (preferable driven by a senior citizen) will save you thousands and thousands of dollars in the initial investment and gain you many more thousands by directing that excess money into your 401K plan (or IRA plan) for retirement!

So, perhaps you need to start looking at your expenses more closely to pay for your retirement. Remember, a dollar saved and invested today with a 5% yield over the next 20 years would be worth $2.65 (The S&P 500 has averaged over 8% annually since 1940). Saving $15,000 by not buying a new car, but getting one that was 3 years old with low mileage would increase your retirement fund almost $40,000 in 20 years.

Year-end action: Max out your 401K plan and/or IRAs to save on 2014 taxes

Make Non-Cash Contributions to Charities (If you itemize)

Most people don’t realize how much Uncle Sam kicks in when they donate to church or other qualified organizations. A cash contribution of $1,000 at the end of the year saves someone $280 in taxes if they are in the 28% tax bracket.

You can also deduct NON-CASH contributions. I have discussed with many of you the importance of donating used clothing, furniture, household items to Salvation Army, etc. This is FREE MONEY as you are saving taxes by donating items you have no further need of.

Example: You have a men’s shirt in your closet in excellent condition. It has been rarely worn as you didn’t like it. Uncle Sam will give you a tax deduction of $12.60 if it is in excellent condition. In the 28% tax bracket, you just saved $3.50 in taxes for something sitting in your closet. How about a man’s suit in excellent condition? Worth $63 in deductions. We have compiled a list created by the Salvation Army and the IRS delineating values for almost every item in your home at very generous deductions. Just email me at info@allancpa.com and I will shoot you a copy.

Also, if you have property that you have owned more than one year that has GONE UP in value (e.g. stock), you can usually deduct the property’s CURRENT FAIR MARKET VALUE if contributed to a qualified charity. For example, you bought a share of stock for $10 and now it is worth $50. If you donate it DIRECTLY to a qualified charity, you get a $50 tax deduction. If you sold it, and then donated it, you would pay tax on the gain ($6) negating a good portion of the tax savings from the contribution.

Year-end action: Assuming you can deduct the full amount of your donations, step up charitable giving at year-end. For instance, if you charge a charitable gift by credit card in December, it is deductible on your 2014 return, even if you don’t pay until January or later. Conversely, if you expect to be in a higher tax bracket in 2015 than 2014, you might postpone large gifts to 2015 when they will be more tax-beneficial. (I am NOT condoning the use of credit cards.)



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Open and fund a Health Savings Account

An HSA is a great way to save money on your 2014 taxes now! It is merely a savings account that you pay your medical bills (not your health insurance) out of. Examples: dentist, co-pays, eyeglasses, doctor visits, prescriptions, etc. You will get a $1 deduction for each dollar invested. I use healthequity.com as an HSA bank. They give you a debit card, and when you go to the doctor, etc. and have to cough up a co-pay, or for a prescription, you give them the card and they charge their fee against it – just like a regular debit card except you get a tax deduction! And it isn’t the regular medical deduction on Schedule A (itemized deductions) it is an “above the line” deduction, just like an IRA. I have electronically setup transfers from my personal checking account to the HSA so I can transfer money at any time.

HSA owners can choose to save up to $3,300 for an individual and $6,550 for a family (HSA holders 55 and older get to save an extra $1,000 which means $4,300 for an individual and $7,550 for a family) – and these contributions are 100% tax deductible from gross income. Multiply your contribution by your tax bracket (say, 28%) and you can see the fabulous tax savings from opening an HSA.

Year-end action: Go online and look for “open HSA account” on google. You will find dozens of financial institutions where you can open an HSA immediately and save taxes in 2014.

Take a deduction for (nearly) worthless securities

Have you got stocks with zero value on your stockbroker account statement? (I do!) Maybe you bought an internet stock years ago and it went out of business. It’s worth nothing to sell, but Uncle Sam will let you save big tax dollars by declaring it on your tax return as worthless. Just let us know what the stock is, when you bought it, and what you paid (should all be available from your broker). Then we can deduct up to $3,000 a year until it is used up (I will have to live to 100 or so… to get mine deducted). Multiply $3,000 times your tax bracket (say, 28%) and you get your savings (e.g., $840). See – that stock wasn’t worthless after all!

Year-end action: Call your broker and sell off those worthless stocks. If they tell you there isn’t a market for them, make sure we know about it so we can take it on your 2014 return.

Sell loser stocks if you have reaped capital gains this year

Similarly, you need to consider selling loser stocks this year if you have taken capital gains (or could, if you sold some winning stocks). Most people hold onto losers and sell winners, not realizing they could pay zero tax possibly by simply selling some of their losers to the amount of the gain of the winners. Example: You have $10,000 in profit on Apple stock you bought this year. You have Lucent stock you have lost $10,000 on. Sell them both and pay zero tax – just like the uber-rich do!

Year-end action: See what losers you can sell to negate your winners this year.

Medical Expense Deductions

Under ObamaCare, the rules for deducting medical expenses are even tougher for young and middle-aged taxpayers (which is one reason we like HSA’s). Beginning last year, you can deduct only unreimbursed expenses in excess of 10% of your AGI. Previously, the limit was 7.5% of your AGI. The limit remains at 7.5% of AGI through 2016 for taxpayers aged 65 or older. By changing the threshold for deducting medical expenses, your government effectively made medical costs much MORE expensive for millions of Americans (and I thought the politicians were supposed to be on our side…).

Frequently, you have no control over timing of medical or dental expenses. In other cases, however, you may be able to schedule visits like physical examinations or dental cleanings. For this purpose, you may count the unreimbursed expenses you pay for your immediate family as well as other tax dependents such as an elderly parent or in-law. Paying these expenses may qualify you for a deduction or boost an existing deduction.

Year-end action: Move non-emergency expenses into the optimal tax year for claiming deductions. For instance, if you are near or already over the 10%-of-AGI threshold for 2014, you may accelerate expenses into this year (get to the dentist, optometrist, and doctor before the end of the year). Otherwise, you might as well delay expenses (and treatment) to 2015, when you could have a chance at a deduction.



Family Income-splitting

Family income-splitting is often used by the wealthy, but you can, too. It is even more meaningful in 2014. ATRA added a new top tax rate of 39.6%, up from 35%, while the rate for taxpayers in the lowest income tax bracket is still only 10%. Thus, the tax rate differential between you and a low-taxed family member, like your child, could be 29.6%, not even counting the 3.8% Medicare surtax.

Year-end action: Shift interests in income-producing property, such as securities, to other family members through direct gifts or trusts. Remember, however, that you are giving up control over those assets.

Also, be aware of the “kiddie tax.” Unearned income (dividends, interest, capital gains, royalties, etc.) above $2,000 received in 2014 by a child younger than 19 or a full-time student younger than 24 is generally taxed at the top marginal tax rate of the child’s parents. Thus, if you’re contemplating a shift of income-producing property to your child, don’t forget to take the kiddie tax into account.


🙂 Now’s the time to buy a car, if you need one (does not have to be new) to claim the added sales tax deduction (if you are able to itemize). Buying a $20,000 car in many Florida counties would generate an added $1,400 tax deduction. Also, historically, the holidays are a slow time of year for auto dealers, leading to the possibility of a better deal.

:-)Keep an eye on tax benefits for higher education expenses. Although the tuition deduction expired after 2013, Congress may renew this tax break (I think they will). Currently, a taxpayer may be eligible to claim one of two higher education credits, subject to phaseouts and other special rules.

In the past, parents could claim one of two credits, the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC), or a tuition deduction for a child’s qualified higher education expenses. However, the tax benefits are phased out for high-income taxpayers. Make sure to pay tuition expenses before the end of the year. The American Opportunity Tax Credit provides up to $2500 for people pursuing undergraduate education. If the child is a dependent of the parent, the parent can claim it on their tax return – if Congress renews it for 2014.

🙂 Make sure to pay your real estate taxes before the end of the year if you want to take that deduction in 2014. If you do not think you have enough to itemize, or want to wait until 2015, pay the real estate tax in January, 2015.

🙂 Make sure you have paid in enough estimated taxes if you think you will owe on April 15th. You may be liable for an “estimated tax penalty” if you fail to pay enough tax through any combination of withholding or quarterly installments. But you can avoid the penalty by paying enough to satisfy a “safe harbor” of 90% of current tax liability or 100% of the previous year’s tax liability (110% if your AGI was above $150,000).

Part 3: Tax Planning and Savings Ideas for Your Business

Repairs and Improvements

From a tax perspective, there is a difference between “repairs” and “improvements.” While expenses spent on making repairs are currently deductible, the cost of improvements to business property must be capitalized. The IRS issued new regulations in 2013 clarifying the distinctions between repairs and improvements.

As a general rule of thumb, a repair keeps property in efficient operating condition while an improvement prolongs the life of the property, enhances its value or adapts it to a different use. For example, fixing a broken window is a repair, but the addition of a new wing to business building is treated as an improvement.

Year-end action: You still have time to schedule minor repairs to be made before the end of the year. The deductions can offset taxable income of your business in 2014.

Section 179 Deductions

Under Section 179 of the tax code, a business may currently deduct, or “expense,” the cost of qualified property placed in service during the year, up to a maximum amount. The deduction is scheduled to drop to only $25,000 for 2014. Make sure that the property is actually placed in service in 2013 to qualify for a current deduction. Note that the Section 179 deduction is available for used, as well as new, business equipment.

Year-end action: Buy equipment you need before the end of 2014 to be able to write the whole thing off in 2014. This could lower your taxes considerably. However! Do not buy something just to save taxes! Yes, you will save money on your taxes – but you will save only the amount based on your tax bracket.

Example: You buy the $10,000 color 3D copier you have wanted ever since you saw it in Popular Mechanics and in Star Trek. If you are in the 28% bracket, you will save $2,800 on your taxes. BUT! You are still out of pocket $7,200!

Also note: If we are your CPAs, then this is something we judge and implement for you based on your specific situation as it relates to your current taxable income and future expectations.

Believe me when I say that most other CPAs and miscellaneous tax preparers do not give this a thought, often NOT taking Section 179 and saving the client taxes when they could have. Rather, other tax preparers often depreciate the smallest item over 5 or 7 years to CREATE ADDITIONAL WORK FOR THEMSELVES ON FUTURE TAX RETURNS for themselves with the accompanying higher fees.

Business Bad Debts

During difficult times, your business may have difficulty obtaining payments for goods or services it provides. At least you may be able to salvage some tax relief for business bad debts on a 2014 tax return ONLY IF you are an ACCRUAL BASIS TAXPAYER. Most of our clients are not, so if you are considering this, contact me at info@allancpa.com.

Year-end action: Step up your collection activities before 2015. For instance, you may issue a series of dunning letters to debtors before the end of the year. If you are still unable to collect the unpaid amount, you may be able to write it off as a business bad debt.

Generally, business bad debts are deducted from taxable income in the year they become worthless. To qualify as a business bad debt, a loan or advance must have been created or acquired in connection with your business operation and result in a loss to the business entity if it cannot be repaid.

Finally, keep detailed records of all your collection activities—including letters, telephone calls, e- mails and efforts of collection agencies—in your files. This documentation can help support your position based on the worthlessness of the debt if the IRS ever challenges the bad debt deduction.

Miscellaneous Items

– Purchase routine business supplies before the end of the year. Your company can generally deduct the costs in 2014 even if the supplies will not be used until 2015. If you pay for business expenses with a credit card, the expenses are deductible in 2014, even though you will pay the bill in 2015. I am NOT condoning the use of credit cards; As your CPA, I am offering an idea on how to save taxes in 2014.

If you are a sole proprietor, the day you charge a purchase to your business or personal credit card is the day the expense is deductible. Therefore, consider using your credit card to buy office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you for it to realize the tax deduction. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

– A company may deduct 100% of business travel costs and 50% of entertainment and meal expenses. To increase your current deduction, accelerate trips planned for 2015 into 2014. Note that a company can deduct 100% of the cost of a holiday party as long as the entire workforce is invited.

– If you buy an SUV for business driving, you may be able to claim a first-year deduction of up to $25,000. The usual “luxury car limits” don’t apply to certain heavy-duty vehicles.

– When you qualify for home office deductions, you may deduct certain expenses incurred in connection with the business use of the home. The IRS recently approved a new simplified home office deduction, capped at $1,500.

– If you are starting a new business, open it before 2015. You are allowed to take a current deduction in 2014 for up to $5,000 for qualified start-up costs, instead of amortizing them over the usual 180-month period.

o When it makes sense, defer compensation, such as year-end bonuses, to 2015. An accrual-basis company may deduct year-end bonuses paid within 21⁄2 months of the close of the tax year (but not for bonuses paid to certain business owners).

o Also, when it makes sense and you can afford to wait for the money, don’t bill your clients/customers until January, 2015. If you are a “cash basis taxpayer” as 95% of our business clients are, by postponing the billing and collections until 2015, you save the amount of tax you would have paid on the money if you had received it in 2014.

Tax Saving Ideas for 2015

– Make sure to set aside a specific room or space to take an Office In Home if you work from your house. We have mentioned this to almost all of our clients over the years, but want to reiterate the benefits of the Office In Home deduction. With OIH, you get to deduct a percentage of your total expenses of running your home (utilities, repairs and maintenance, etc). Thus, you get a tax deduction for expenses you must buy anyway. This space or room must be utilized ONLY to conduct your business, not have your kid play games on the computer or have your Uncle Lou crash at your house when he comes down from Milwaukee.

– Hire your kid (or spouse): Tired of giving out allowances to your kid(s)? Maybe they need to learn the value of work and earning money? Hire them for your business (as long as it is a legitimate job they are performing). For example, I hired my 10-year old son years ago to be my IT guy. Heck – he knew more about computers than I did and he wasn’t doing much around the house to help out.

– Move your business taxes to an S Corp. Here is another item we discuss with clients that most other tax preparers do not. Our goal is to save you money legitimately, not merely getting the return done as fast as possible. If you have a business, and it turns a profit, and it is not an S Corp, you will be paying income tax AND SELF-EMPLOYMENT TAX OF (15.6%) on every dollar of profit. Therefore, you might be paying upwards of 40% tax on your profits! If we turn you into an S Corp, we can generally save a substantial portion of the self-employment taxes you would otherwise pay, often saving clients thousands of dollars a year.

Part 4: Tax Planning and Savings Ideas for Your Investments

Capital Gains and Losses

Capital gains and losses are used to offset each other. If you have a net loss, the excess may offset up to $3,000 of ordinary income. Any remaining loss is carried over to next year.

Traditionally, investors focus on “harvesting” capital losses from securities sales before year-end to offset prior gains. Conversely, if you are showing a net capital loss, you might realize capital gains at the end of the year that will be offset by prior losses.

Basic tax law rules require capital gains and losses to be netted and to offset each other. Any excess loss may offset up to $3,000 of ordinary income before it is carried over to the next year. A net long-term capital gain is generally taxed at a maximum rate of 15%, but it is 20% for those in the top ordinary income tax bracket. Short-term capital gains are taxed at ordinary income rates.

Year-end action: In recent years, there has been more focus on harvesting capital gains. Significantly, a 0% capital gains tax rate applies to taxpayers in the lowest two regular income tax brackets of 10% and 15%. Even if your capital gains push you into a higher tax bracket, you still benefit from the 0% rate on the portion of the gains up to the top income threshold for the 15% tax bracket.

Also, note that the stock market is at historic highs. Consider taking some profits off of the table so that you have locked in gains before the next market downturn.

3.8% Medicare Surtax

Beginning in 2013, the 3.8% Medicare surtax applies to the lesser of your “net investment income” (NII) or the amount by which your modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for joint filers. (Don’t hurt your brain trying to figure this out. That’s our job as your CPA).

Basically, if you make too much money (according to the fine politicians who make those determinations) you will be paying added tax on investment income.

Year-end action for 2015: Take steps to reduce exposure to the 3.8% surtax. For instance, depending on your situation, you might use one or more of the following techniques.

– Add municipal bonds (“munis”) to your portfolio.
– Establish a charitable remainder trust (CRT). With a CRT, you qualify for a current tax deduction
while the income is sheltered from the surtax.
– Consider an investment in a tax-deferred annuity that “leapfrogs” your highest-earning years when the 3.8% surtax is likely to apply.

Of course, these decisions should not be made in a vacuum. Coordinate tax-related tax-saving strategies with other financial aspects. Discuss these with your financial planner (if you need a referral to a qualified financial planner, one our clients are happy with, please contact me at allan@allancpa.com ).

Roth IRA Conversions

There are two main types of Individual Retirement Accounts (IRAs): traditional IRAs and Roth IRAs. In brief, contributions to traditional IRAs are generally tax deductible, but future distributions are taxed at ordinary income rates (when you take the money out).

Conversely, Roth IRA contributions are never tax deductible, but qualified distributions from a Roth in existence five years are 100% tax-free. This includes distributions made after age 591⁄2, on account of death or disability. Other distributions may be taxable under special rules.

Year-end action: Consider converting some or all of the funds in a traditional IRA to a Roth. The transfer is currently taxable, but can provide future tax-free benefits. This is especially important if you expect to be in a higher tax bracket in the next few years. Discuss this with us before you do it as Roth Conversions might make you subject to the 3.8% Medicare Tax mentioned above.

Required Minimum Distributions

As a general rule, you must receive “required minimum distributions” (RMDs) from qualified retirement plans and IRAs after attaining age 701⁄2. The amount of the distribution is based on life expectancy tables.

Year-end action: Arrange to take RMDs well before the end of the year to avoid any potential problems. The penalty for a failure is severe: It is equal to 50% of the required amount (less any amount you have received).

However, be aware of this special exception. If you are still working and not a 5%-or-more owner of the business you are employed by, you can postpone RMDs from the employer’s qualified plan until retirement. This rule does not apply to RMDs from IRAs.

Note that RMDs are not treated as Net Investment Income of the 3.8% NII Medicare surtax. Nevertheless, an RMD may still increase your MAGI in the surtax calculation.

Estate and Gift Taxes

Year-end action: It is vital (!) that you have a current will. We will be happy to refer you to a qualified attorney who can help you in this regard. Also, ensure that your estate plan reflects the latest developments in tax law. For instance, American Tax Relief Act permanently retains the portability provision for married couples, so wills and trusts may be revised to take this into account. Seek guidance from an estate tax attorney.

Also, as I have discussed with many of you, now is a good time to consider a “Living Trust.” These trusts allow your assets to skip probate court when one dies. Your estate will save thousands of dollars and get the proceeds immediately instead of possibly waiting years while the estate sits in probate court. Talk to an estate tax attorney about these.

In any event, be aware that you still may reduce the size of your taxable estate through a series of lifetime gifts to family members. Under the annual gift-tax exclusion, you can give each recipient up to $14,000 in 2014 and 2015. The annual exclusion is doubled to $28,000 for joint gifts by a married couple.


– As I have mentioned to many of you, consider investments in dividend-paying stocks, mutual funds that are focused on capital gains, and funds that concentrate on municipal and other non- taxable income. As with net long-term capital gains, the maximum tax rate on qualified dividends received in 2014 is generally 15% (20% for certain high-income taxpayers) while lower-income taxpayers may benefit from a 0% rate.

– Note: If you are retired and drawing social security, consider taking withdrawals every year from your IRAs and 401Ks, rather than taking it out all at once. Often, our retired clients are in lower tax brackets than when they were working. And, unfortunately, many older taxpayers do not tap into their IRA’s or 401K’s until there is a medical emergency or to help out a child, etc. Taking large sums out of your IRA’s and 401K’s can elevate you into the highest tax brackets costing you tens of thousands of dollars in added taxes, than if you were to just tap into your retirement plans gradually.


This year-end tax-planning letter is based on the prevailing federal tax laws, rules and regulations. Of course, it is subject to change, especially if major tax reform provisions are enacted before the end of the year. (Nothing surprises me with Congress.) Finally, remember that the letter is intended only as a general guideline. Your personal circumstances will likely require greater examination. We will be glad to schedule a meeting with you to provide assistance with all your tax-planning needs.

From our families to yours: May this be most joyous of Christmas Seasons and may you be blessed with a healthy, safe and prosperous New Year.

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