As the year draws to a close, here are some useful maxims to keep in mind as you prepare your tax returns.
Maximize Deductions for Charitable Gifts
Your generosity this giving season could come back to you in the form of a charitable tax deduction. Here’s what to keep in mind:
Keep good records of your contributions. All cash contributions require either a bank or credit card record or a receipt from the organization. If your cash contribution is more than $250, make sure to obtain, from the organization, a written acknowledgment or receipt that indicates the value (if any) of property or other benefits you received by making the contribution. A personal log of your contribution doesn’t cut it anymore.
If you donate clothing, household goods or other property valued at $500 or more for the year, you’ll have to file IRS form 8283 (Non-cash Charitable Contributions) with your return. The IRS is interested to see how you substantiate the value of your deduction.
Balance Capital Gains and Losses
Typically, you might realize capital gains from sales of securities or other property to offset capital losses or harvest losses to offset prior gains. The maximum tax rate on long-term capital gains is 15% (20% for those in top 39.6% ordinary income bracket). Conversely, any excess loss may offset up to $3,000 of ordinary income before any remainder is carried over to next year. Note: A 3.85 surtax on net investment income (NII) may also apply.
Contribute to Retirement Plans
Maximizing your contributions to a qualified retirement plan can both reduce your current tax obligations and boost your retirement savings. For 2014, here are the contribution limits as set by the IRS:
• 401(k) plan participants can defer up to $17,500 of pre-tax income ($23,000 if you’re age 50 and older). The deadline to make these contributions for this year is December 31,2014.
• Individual retirement account (IRA) contribution limits are $5,500 ($6,500 if you’re age 50 or above).
Manage Your Benefits Savings Accounts
Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) generally require annual re-enrollment if you want to continue to participate. If you do, review your 2014 out-of-pocket expenses and adjust your 2015 contribution amounts accordingly. Note: Many FSA arrangements are use-it-or-lose-it; balances are forfeited at year-end. A change in the law, however, now allows employers to offer either a two-and-a-half month grace period to use up the money for the previous year or a carryover of $500 per year to use in the following year. The new flexibility isn’t automatic, so make sure you know the rules for your employer’s plan, or you will run the risk of losing some of the money in your FSA. However, HSA balances can be carried forward from year-to-year.
If you intend to make substantial gifts to anyone, do so before the end of the year to help reduce your taxable estate:
• You can give $14,000 in 2014 to any one person without paying a gift tax or using your lifetime gift/estate tax exclusion. This exclusion can be used to reduce the amount of your taxable estate. If you’re married, you can jointly gift up to $28,000 to a single recipient.
• Keep in mind that you can make as many gifts to as many people as you wish, related or not, without tax impact, as long as the total amount of gifts per recipient, per year, doesn’t exceed the annual exclusion limits.
• There is also an exclusion from gift tax for amounts paid directly to an institution for medical care or tuition.
Develop a Strategy for Company Stock Benefits
Exercising incentive stock options (ISO) or non-qualified stock options (NSO) or restricted stock grants vesting in 2014 could have significant tax consequences, including alternative minimum tax (AMT) implications. If you have been granted any type of company stock benefit, work closely with your tax professional to develop both a short and long term strategy for managing these valuable benefits tax efficiently.
Factor in the AMT
Despite recent increases in exemption amounts for the alternative minimum tax (AMT), many taxpayers still must pay this “stealth tax.” Generally, the AMT applies if you have an overabundance of “tax preference items,” especially if you reside in high-tax state. Have a review of your AMT liability conducted to determine whether you should shift income items or deductions at year-end.
Shift Income Between Family Members
When they appreciate in value, transfer income-producing properties to low-bracket family members. Note that a 0% rate on long-term capital gains applies to taxpayers in the two lowest ordinary income tax brackets. Caveat: Under the kiddie tax, unearned income of a young child generally is taxed at your tax rate to the extent it exceeds $2,000 in 2014.
Depending on your situation, you may use one or more of these tips or others. Have a year-end plan tailored to your needs. Consult your tax advisor for guidance.
Rita Bhayani is a Certified Public Accountant and a Certified Management Accountant practicing at Pleasanton, CA and she protects the clients from the IRS. For more information log on to www.ritacpa.net.