Year End Tax Tips
As we approach the end of the 2014 tax year it is once again time to review your financial situation and consider year-end tax planning strategies that might make a difference in your tax bill for 2014 and plans for 2015. Several new requirements and responsibilities under the Patient Protection and Affordable Care Act will impact all taxpayers.
We will have new tax forms to file this year as a result of the Affordable Care Act. Taxpayers may receive additional tax forms that they will need to bring to the tax appointment. Here is some important information for every taxpayer:
- Taxpayers who were eligible for an exemption from Healthcare.gov should receive an exemption letter with an Exemption Certificate Number. Please bring that form to your tax appointment. It will be necessary to complete the tax return.
- Did you have a health insurance policy all year? If not, bring a listing of the months that you and all members of your family were covered and the amount of premiums paid.
- Did you receive the advanced Premium Tax Credit from Healthcare.gov? If yes, you will need to bring Form 1095-A to your tax appointment.
- You will need to provide information on health insurance coverage and income for all dependents, for each month of the year.
- If you receive Form 1095-B this year please bring it to your appointment as well.
Having all of this information available at your first appointment will help this new process go smoothly for all of us.
Although there is still talk of comprehensive tax reform nothing has materialized as of December 15,2014. It is not likely than any broad tax reform measures considered in the next Congress will be effective until at least 2016.
The 2014 tax rates remained the same as last year for most individuals, ranging from 10% to 35% for ordinary income and 0-15% on capital gains.
For higher income taxpayers ($406,750 taxable income for Singles, $457,600 for Married Filing Joint, $432,200 for Head of Household and $228,800 for Married Filing Separate), the 2013 tax year brought increased tax rates (39.6%) on ordinary income, capital gains and dividends (0-20%). Currently, the income brackets were raised from 2013 but the 39.6% rate remained the same for 2014.
For 2015 the 39.6% rate will be applied to income in excess of $413,200 for Singles taxpayers; $464,850 for Married Filing Joint filers; $439,000 for Head of Household filers; and $232,425 for Married Filing Separately taxpayers.
Two additional taxes—a 0.9% Medicare tax on wages and self-employment income and the new 3.8% surtax on net investment income imposed by the 2013 Health Care and Education Reconciliation Act.
The 0.9% additional Medicare tax on wages and self-employment income in excess of $200,000 for Single taxpayers, $250,000 for Married Filing Joint returns and $125,000 for those taxpayers filing Married Filing Separate returns remains the same for 2015. If you had not anticipated being affected by this tax you should consider requesting some additional federal withholding or making an estimated tax payment to cover this additional tax.
The Net Investment Income surtax applies to the lesser of:
- A taxpayer’s net investment income or
- The excess of modified adjusted gross income over the threshold amount of
- $250,000 for married taxpayers filing jointly
- $125,000 for married taxpayers filing separately
- $200,000 for individuals filing as single or head of household
Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. This new tax makes planning more important than ever for higher income taxpayers.
If you sell assets such as rental properties with capital gains that are subject to the surtax consider using an installment sale or like-kind exchange.
Contact Peoples Tax at 804-204-1040 or email usfor additional information.
Traditional Year-End Tax Strategies
Income deferral strategies shift income to the following tax year. If you expect to be in the same or a lower tax bracket in 2015 it may be advantageous to defer some of your income or accelerate deductions into the current year. Income deferral strategies are as follows”
- Self-employed, cash basis taxpayers can delay billing clients until late in the year so that they will not receive the payments until 2015.
- Try to convince your employer to consider paying bonuses in January rather than December.
- Delay selling stocks with capital gains (unless they can be offset with losses)
- Sell stocks that are in a losing position to reduce income this year.
- Delay IRA or retirement account distributions. If you are 70 ½ don’t delay the required minimum distribution.
- Convert taxable compensation into tax free fringe benefits such as negotiating to receive an incentive stock option in place of some salary. Exercising the ISO does not produce taxable income for regular tax or the surtax, but is taxable for alternative minimum tax purposes.
- Pay tax deductible expenses before the end of the year. Consider using a credit card which will conserve your cash but allow the deduction in this year.
- Maximize 401(k) and IRA contributions. Don’t forget catch-up contributions for taxpayers over 50.
- If you are self-employed set up self-employed retirements plan.
- Make qualified charitable donations (QCDs) from your IRA. If you are at least 70 ½ contributions to IRS approved charities made directly from your IRA to the charity can be used to satisfy the minimum required distribution rules but are tax free to you.
- Consider asking your employer to increase your state tax withholding now if you expect to owe state taxes when you file your return to accelerate the deduction into 2014.
- If you elect to deduct the sales taxes rather than state income taxes on your Schedule A, accelerate large purchases such as automobiles or boats into the current year in order to take advantage of the sales tax deduction
The following provisions were set to expire at the end of 2013. However, Congress has passed late legislation making these provisions retroactive to January 1, 2014 and expiring on December 31, 2014.
- State and local sales and use tax deduction: Taxpayers were allowed to deduct the larger of sales and use taxes or state or local income taxes paid. This provision has been particularly beneficial to retired individuals who did not have state tax withholdings during the tax year.
- Qualified Charitable Distributions: IRA owners or beneficiaries who are 70 ½ or older were permitted to make cash contributions from their IRA accounts of $100,000 or less to IRS recognized charities.
- Mortgage Insurance Premiums (PMI) deductions as qualified residence interest will expire December 31, 2014.
- Tax credits for energy-saving home improvements expire at the end of 2014.
- Teachers: the $250 deduction for purchasing classroom supplies will expire December 31, 2014.
- Qualified Tuition Expenses: The deduction from adjusted gross income for qualified tuition and fees was extended as well.
- The 50% bonus first-year depreciation deductions and the $500,000 deduction limit for Section 179 property purchased and placed in service in the current year have been extended. The ability to expense $250,000 (of the $500,000 limit) for qualified real property purchases has been extended . The $2 million investment amount phase out for Section 179 expensing deductions applies for purchases prior to December 31, 2014.
- The 15 year amortization for qualified real property was extended.
- Work Opportunity Tax Credits for employers hiring veterans and certain other workers will expire at the end of 2014. Employees must be hired by December 31, 2014 to qualify.
- The qualified research expenditures credit was extended to the end of 2014.
- If you own an S corporation or a partnership consider increasing your basis in order to deduct a loss this year or suspended losses from prior years.
Each taxpayer’s particular situation and goals are unique to that individual or family and you must make decisions after careful consideration of all of the facts and circumstances. Decide which strategies or tips will be beneficial to you and your family. Remember to review last year’s tax return, take advantage of expiring tax provisions whenever possible, plan for next year, stay informed and make your goal to minimize your tax liability as much as is legally possible .
Reducing your taxes is the right thing to do. U.S. Court of Appeals Judge Learned Hand expressed his views on a taxpayer’s duty to “pay our fair and legitimate” share of taxes when he said:
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best pay the treasury, there is not even a patriotic duty to increase one’s taxes. “
Questions? Call us at (804) 204-1040 or email us.
Don’t Let Debt Ruin Your Holiday Season
While the holiday season conjures thoughts of joy and family celebration, for those in credit card debt, it can be a stressful time. This year, don’t let spending and debt fears interfere with your cheer. Consider the following ways to manage and reduce your personal debts while enjoying holiday traditions.
Tackle Everyday Expenses
Before you start spending, it’s important to figure out exactly where you stand financially right now. This includes assessing your current debt. You may have a general idea of what you owe, but writing it all out with dollar figures can make it real. Include everything from your mortgage and credit card to your student loans and that $10 you owe a friend to get a full picture.
Generally, it’s a good idea to pay off debt with the highest interest rates first and pay on time, with more than the minimum due. Some people prefer to pay off the smallest debt first (remember that $10 you owe a friend) to start crossing things off the list. Whichever path you choose, the idea is that you are focusing on debt repayment. Once you have a plan in place, you can think about spending more purposefully this holiday.
Make a list of people you plan to buy for this holiday season. Include what gifts you would like to buy them or how much money you plan to spend. This can help you develop a budget. If you don’t know exactly what to get everyone on your list, leave a few similarly priced options.
It’s important not to let your feelings (you want loved ones to feel loved or thrilled by their presents) compel you to spend more on gifts than you can realistically afford. Your family, friends and loved ones will understand your situation and appreciate any effort regardless of the price tag. Stick to your list and try to avoid impulse spending. If you see something great for someone but you’ve already bought their present, make a note for next year or for that person’s birthday.
The best advice is to start your holiday planning and shopping early (of course, now that advice is for next year). This can spread your purchases over several months and allow you to comparison-shop.
If you can’t do that, include a category for gifts in your yearly budget. This can include birthdays and holidays and then be spread over 12 months. So if you are setting aside a certain dollar amount each month into an account for this purpose, you can pay with cash when it’s time to buy.
Another great way to limit spending is making use with what you already have. If you have lots of credit card debt, you might also have lots of credit card rewards stocked up. See if these can help you get gifts or be used to travel during the holidays.
Homemade, DIY gifts and decorations save you time and money, but can be appreciated even more than store-bought items because they are more personal. Also, consider some free activities you and your family can share, and even try using these as gifts.
Plan an ice skating trip with your niece or nephew or promise a romantic evening in the new year for your spouse. This means no spending now and thus, no more debt. Fun doesn’t have to come with an anxiety-inducing cost.
Give Bill Dates Priority
No matter what holiday craziness is distracting you, it’s important to pay your bills on time. If this is impossible, contact your creditors and let them know you are struggling to make ends meet. Tell them why it is a difficult time for you and see if they can work out a modified payment plan to a more manageable amount and timetable.
Make the most of post-holiday sales and consider gifting in January (or giving gift cards that are likely to buy much more after the holidays) as a way to stretch your dollars. For the most part, the items will not change, but their prices will. This can be really helpful if you are in debt.
The cost of maxing out your credit cards during the holidays can linger long after the holidays because of the impact it can have on your credit score. And bad credit can cost you thousands over your lifetime.Smith, AJ. “Don’t let debt ruin your holiday season.” The Detriot News. N.p.,30 November 2014. Web. 4 December 2014.
Questions? Call us at (804) 204-1040 or email us.
Six IRS Tips for Year-End Gifts to Charity
Many people give to charity each year during the holiday season. Remember, if you want to claim a tax deduction for your gifts, you must itemize your deductions. There are several tax rules that you should know about before you give. Here are six tips from the IRS that you should keep in mind:
- Qualified charities. You can only deduct gifts you give to qualified charities. See if the group you give to is qualified. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies. This is true even if the IRS does not list them in its database.
- Monetary donations. Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union and credit card statements. If you give by payroll deductions, you should retain a pay stub, a Form W-2 wage statement or other document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.
- Household goods. Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item, it does not have to meet this standard if you include a qualified appraisal of the item with your tax return.
- Records required. You must get an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.
- Year-end gifts. You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2014. This is true even if you don’t pay the credit card bill until 2015. Also, a check will count for 2014 as long as you mail it in 2014.
- Special rules. Special rules apply if you give a car, boat or airplane to charity.
For more information call your Peoples Tax representative at 804-204-1040 or email us.
Save Twice with the Saver’s Credit
If you are a low-to-moderate income worker, you can take steps now to save two ways for the same amount. With the saver’s credit you can save for your retirement and save on your taxes with a special tax credit. Here are six tips you should know about this credit:
- Save for retirement. The formal name of the saver’s credit is the retirement savings contributions credit. You may be able to claim this tax credit in addition to any other tax savings that also apply. The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans.
- Save on taxes. The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.
- Income limits. Income limits vary based on your filing status. You may be able to claim the saver’s credit if you’re a:
- Married couple filing jointly with income up to $60,000 in 2014 or $61,000 in 2015.
- Head of Household with income up to $45,000 in 2014 or $45,750 in 2015.
- Married person filing separately or single with income up to $30,000 in 2014 or $30,500 in 2015.
- When to contribute. If you’re eligible you still have time to contribute and get the saver’s credit on your 2014 tax return. You have until April 15, 2015, to set up a new IRA or add money to an existing IRA for 2014. You must make an elective deferral (contribution) by the end of the year to a 401(k) plan or similar workplace program.If you can’t set aside money for this year you may want to schedule your 2015 contributions soon so your employer can begin withholding them in January.
- Special rules apply. Other special rules that apply to the credit include:
- You must be at least 18 years of age.
- You can’t have been a full-time student in 2014.
- Another person can’t claim you as a dependent on their tax return.
- Call your Peoples Tax representative. We can figure your credit amount based on your filing status, adjusted gross income, tax liability and the amount of your qualified contribution. Other rules also apply.
Questions? Call us at (804) 204-1040 or email us.
Reporting Tip Income – Restaurant Tax Tips
Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.
Employees must report tip income on Form 4070, Employee’s Report of Tips to Employer (PDF), or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
- The employee’s name, address, and SSN.
- Your name and address.
- The month or period the report covers.
- The total tips received.
No report is required from an employee for months when tips are less than $20.
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee’s wages or from other funds he or she makes available.
Allocation of Tips
As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
- Gross Receipt Method
- Hours Worked Method
- Good Faith Agreement
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS.
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.
Tip Reporting Requirements for Employers
Employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (PDF) to report employee tip income. A large food or beverage establishment is defined as business where all of the following apply:
- Food or beverage is provided for consumption on the premises
- Tipping is a customary practice
- More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.
Questions? Call us at (804) 204-1040 or email us.