2014 Year-End Individual and Entity Income Tax Planning and Update - - PDF document

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2014 year end individual and entity income tax planning
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2014 Year-End Individual and Entity Income Tax Planning and Update - - PDF document

Sep 20, 2023 436 likes •715 views

11/20/14 2014 Year-End Individual and Entity Income Tax Planning and Update Presen Presented t d to: Norfolk & Plymouth Estate and Business Planning Council November 19, 2014 Presented By: Stephen Colella Jon Bicknell Partner

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2014 Year-End Individual and Entity Income Tax Planning and Update

November 19, 2014

Presen Presented t d to:

Norfolk & Plymouth Estate and Business Planning Council

Financial Professional Use Only

Presented By:

Stephen Colella Partner scolella@dgccpa.com 781-937-5377 DiCicco, Gulman & Company LLP

Woburn, MA | Boston, MA p: 781-937-5300 | www.dgccpa.com

Jon Bicknell Financial Advisor jbicknell@investorscapital.com 781-262-3030

Investors Capital Corp

Burlington, MA www.investorscapital.com

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Introduction

  • This presentation will discuss the

following:

  • Tax Law updates,
  • Income tax planning considerations, including

minimizing the Medicare surtax hit,

  • Retirement plan options,
  • Maximizing charitable deductions,
  • Tax driven investment choices,
  • Estate and Gift tax planning, and
  • Tax planning for Businesses.

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Tax Extenders

  • No action yet from Congress on the 57

Individual and Business tax provisions that expired in 2013 and 6 tax provisions that are set to expire at the end of 2014.

  • Expected vote in either November/ December

2014, or possibly even January 2015.

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Year-end Planning

Understanding your client’s tax situation and keeping everything in context

  • Current tax rate
  • AMT
  • Capital gain trap
  • 3.8% tax on NII
  • 0.9% tax on earned income
  • Marginal rate
  • Expiring deductions, credits, and carryovers
  • Carryover tax benefits

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Tax Landscape

  • Top ordinary income tax rates at 39.6%

($458K MFJ/$407K single) – indexed for inflation

  • Qualified dividends and LTCG tax rate 20% for

taxpayers subject to the 39.6% tax rate, else 15%

  • 3.8% Medicare tax on investment inc + 0.9%

Medicare on wages & SE inc over MAGI thresholds of 250K (MFJ) / 200K (S) – same as 2013

  • Medical Expense thresholds at 10% except for

taxpayers over 65, but AMT threshold continues to be 10% for all taxpayers – same as 2013

  • Taxpayers in AMT may consider prepaying state

taxes to minimize 3.8% Medicare Surtax

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Deferral/acceleration of income/deductions

  • Which items of income/deduction does the taxpayer have

CONTROL over?

  • Consider multi-year tax projections in order to analyze

impact of timing on overall taxes.

Timing is Everything

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Timing is Everything

PLANNING NOTE: If you have a client who has peaks and valleys in income such that some years might be above the thresholds and some years below, control the timing of income and deductions to avoid the high brackets and/or Medicare taxes in some years.

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  • Categories – Creating the right mix :

– Taxable Investments – After Tax / Tax Deferred – Pre Tax / Tax Deferred – Tax Favored

  • Factors to take into account :

– Current and Future tax brackets – Current Holdings / Annual Savings to category – Other Income stream in retirement – Pre 59 ½ need or not

Your Wealth – Categories

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– Interest Income – Dividend Income – Capital Gains – Considerations:

  • Liquidity
  • Flexibility for use
  • Estate Planning – step up in basis

Taxable Investments

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  • Deductible IRA’s
  • Retirement Plans – 401(k), 403(b), etc

– Considerations:

  • Current year Income Tax deduction
  • Future Ordinary Income tax due
  • Balance Current / Future brackets

Pre Tax / Tax Deferred

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  • Non Qualified Variable Annuities

– Considerations

  • Tax Deferral
  • Future Taxation

– Ordinary Income – Tax Favored – Return of Capital

  • Inherited Stretch Annuity
  • Pass in Kind – then Stretch
  • Post Death 1035 exchange – then Stretch

After Tax / Tax Deferred

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  • Roth IRA’s / 529 Plans

– No tax deduction , Tax Free Income

  • Municipal bonds

– Tax Free Income

  • Life Insurance

– Tax Deferred Growth – Tax Free Death Benefits / Loan’s

  • Oil & Gas

– Intangible Drilling Costs, Depletion

Tax Free / Tax Advantaged

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  • Everything in context
  • Investment Location – Stocks vs. Bonds
  • Accumulation

– Tax bracket dependent

  • Retirement

– Balance / Use Taxable pre 70 ½

  • Estate Planning

– Pass efficient assets

Creating the right mix

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Medicare Surtax

The Medicare surtax is equal to 3.8% on the lesser of a high income earning individuals’:

  • Net Investment Income (NII) or
  • Modified Adjusted Gross Income over 250K

(MFJ) / 200K (S)

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Medicare Surtax

Net Investment Income is the excess of the following over any allowable deduction properly allocated to such income:

  • Interest, dividends, annuities, passive royalties, & non-

passive income/loss from trader K-1s

  • Gross income from trade or business of trading in

financial instruments or commodities

  • Gross income from PASSIVE trade or business & rents
  • Net gain from disposition of property not held in an

active trade or business

  • PFIC income should already be included in interest

and dividends above

  • If Real Estate Professional falls within the safe harbor

DO NOT include the related income in this calculation

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Medicare Surtax

PLANNING NOTE: Taxpayers with higher incomes should differentiate and substantiate income derived from an active business from their passive investment income to shield income from surtax.

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Capital gains/losses

  • 20%/15%/0% rates made permanent
  • Harvesting and/or warehousing losses
  • Wash sale rules for losses
  • Worthless investments, including abandonment
  • Installment sales
  • Non-business bad debts
  • Deferring gains to 2015

Year-end Planning

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Salary

  • Review of withholding to avoid estimated tax penalties
  • Inquire about year end bonuses
  • Exercise of nonqualified stock options when value is low

and ordinary tax rates are low, if possible

Year-end Planning

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Charitable planning

  • AGI limitations
  • Tax rate of benefit
  • Use of donor advised fund or private foundation
  • Long term, appreciated publicly traded securities
  • Exclusion from gross income of qualified charitable

distribution for RMD, was NOT EXTENDED for 2014

  • Itemized deductions phase-out for 2014 applies to higher

income taxpayers 300K (MFJ)/ 250K (S) (indexed for inflation)

Year-end Planning

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Community Investment Tax Credit

  • GOAL: To enable local residents and stakeholders to work with and through

community development corporations to partner with nonprofit, public and private entities to improve economic opportunities within the community

  • The tax credits are equal to 50% of the donation made by individual or corporate

taxpayers.

  • Tax credits are applied against MA tax liability, and are REFUNDABLE.
  • Contributions to CDCs are also deductible for federal purposes, subject to

interplay with MA

Year-end Planning

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Roth conversions

  • No income limit for Roth IRA conversions
  • Full or partial conversions
  • Factors to consider:
  • Years to retirement
  • Tax rates now vs. later
  • Assets needed at retirement
  • Tax paid from non-retirement assets
  • Charitable use
  • Current tax attributes
  • If have recharacterized a prior conversion, consider re-converting

after 30 days

  • Consider timing – now versus early 2015
  • Interplay with 3.8% Medicare tax

Year-end Planning

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  • Business

– SIMPLE IRA – SEP IRA – 401(k) - Safe Harbor 401(k) – Single (k) Plan – Profit sharing – Integrated / New Comparabilty – Defined Benefit – Cash Balance Plan

Retirement Plan Considerations

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Retirement Plan Illustrations

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Retirement Plan Illustrations

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Year-end Planning

Schedule C and E deductions

  • 1099s need to be issued
  • Accelerate expenses and defer income
  • Consider retirement plan option
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Residential tax credits

  • 30% of qualified solar, small wind, geothermal

property (no limit) placed in service before 2017

Education credits

  • American Opportunity Credit (formally the Hope

Credit) up to $2,500/year for 4 years (thru 2018) 100% phase out for MAGI 180K (MFJ) / 90K (S)

  • Planning opportunity for clients above income

threshold whose children have taxable income

Income Tax Update

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Other items:

  • Safe harbor estimates
  • 110% of 2013 tax if AGI >$150K
  • 100% of 2013 tax if AGI < $150k, or
  • 90% of 2014 tax

INCLUDING MEDICARE TAXES

Income Tax Update

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Income Tax Update

Other items to consider:

  • Kiddie Tax continues to apply to students under 24
  • Consider refinancing old debts
  • Consider borrowing against securities

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  • Annual gift exclusion of $14K in 2014 and

expected to stay the same in 2015.

  • Lifetime gift and GST exemption $5.34M/

taxpayer for 2014 (expected to be $5.43M/taxpayer in 2015).

  • PLANNING NOTE – Taxpayers who previously

“maxed out” their $5M have the ability for additional gifting due to inflation adjustments.

Estate and Gift Update

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Foreign Reporting Update

Continued focus on international activity

  • Foreign Bank Account Reports (FBAR)
  • Foreign Account Tax Compliance Act (FATCA) – no

regulations are issued for entities at this time – this may again be a reprieve for the current year tax filing

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Questions?

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Depreciation - Tax Breaks that Expired at End of 2013 and Have Yet to Be Renewed

  • Increased limitation of $500K in Section 179 expenses, $2M

phase-out threshold, and expanded definition of Section 179 property

  • Bonus depreciation
  • Fifteen-year straight-line cost recovery for qualified leasehold,

restaurant, and retail improvements

Business Asset Expensing Rules

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Section 179 Deduction

  • Without Congressional action, Section 179 deduction limit

decreases from $500K in 2013 to $25K in 2014

  • Phase-out threshold drops significantly from $2M in 2013 to $200K

in 2014 (deduction is reduced dollar-for-dollar if investments exceed $2M in 2013 and $200K in 2014)

  • Provision allowing up to $250K of Sec. 179 expensing for qualified

leasehold improvement property, qualified restaurant property, and qualified retail improvement property expires after Dec. 31, 2013

Business Asset Expensing Rules

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Bonus Depreciation

  • Since 2008, businesses were able to deduct 50% or more of

qualifying assets (typically, tangible personal property and leasehold improvements)

  • Provision expired after Dec. 31, 2013

15-year Straight Line Cost Recovery for Qualified Leasehold, Restaurant and Retail Improvements

  • Provision allowing a shortened recovery period of 15 years – rather

than 39 years – for qualified leasehold-improvement, restaurant and retail-improvement property expires after Dec. 31, 2013

Business Asset Expensing Rules

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Section 179 vs Bonus Depreciation

  • Section 179 deduction covers new and used assets while bonus

covers only new assets (with a recovery period of 20 years or less as well as off-the-shelf software)

  • Sec. 179 is based upon when taxable years starts while bonus is

based upon when assets are placed in service

  • Calendar year taxpayers: no difference
  • Fiscal year taxpayers: have until the end of their 2013 tax year to

place assets in service to qualify for Sec. 179 deduction but only until Dec. 31, 2013 to qualify for bonus

Business Asset Expensing Rules

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Section 179 vs Bonus Depreciation

  • Sec. 179 allowed only to the extent of taxable income derived from

the active conduct of a trade or business while bonus is not subject to any income limitations (can generate or increase a loss)

Business Asset Expensing Rules

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State 179 Expense Allowed Investment Expense Limit Bonus

  • Adj. Required?

MA Follows Federal Yes CA $25,000 Limit $200,000 Phase-Out Yes CT Follows Federal Yes ME Follows Federal Yes NH $20,000 Limit No Phase-Out Provided Yes NY Follows Federal Yes RI Follows Federal for Assets Placed in Service on or after 1/1/2014 $25,000 Limit for Assets Placed in Service Prior to 1/1/2014 $200,000 Phase-Out for Assets Placed in Service Prior to 1/1/2014 Yes VT Follows Federal Yes

Rules By State

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2013 2014 Equipment purchases: $600,000

  • Sec. 179 deduction

500,000 50% bonus depreciation 50,000 N/A First year depreciation 10,000 120,000 Total first year deduction 560,000 120,000 Cash savings (@ 35%) 196,000 42,000 Equipment cost after tax 404,000 558,000

Example

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Tax Planning Opportunities:

  • First, take Sec. 179 on all used equipment; second, take full Sec.

179 on assets with the longest life; third, take bonus on all new assets that qualify; fourth, take normal depreciation on remaining value

  • Bonus depreciation is not mandatory; a decision is not required until

a return is filed. Certain taxpayers should consider electing out of bonus to spread deductions more evenly over future years

  • Consider a cost segregation study, if taxpayer purchased or built a

building or remodeled existing space

Business Planning

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Other Tax Breaks that Expired at End of 2013 and Have Yet to Be Renewed

  • Research and experimentation tax credit
  • Work Opportunity Tax Credit (WOTC)
  • Special rules for qualified small business stock
  • Reduction in S corporation recognition period for built-in

gains

  • Section 179D energy efficient commercial building deduction

Business Planning

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Research Credit

  • Congress is likely to extend this credit, as it has done

repeatedly since it was established in 1981

  • Credit may be claimed for increases in business-related

qualified research expenditures

  • Applies to the excess of qualified research expenditures for

the tax year over the average qualified research expenditures measured over four preceding years

Business Planning

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Research Credit

  • Planning Note. Regardless of whether the credit is restored,

investigate whether a business is eligible for the credit for previous years. The IRS issued new regulations in June allowing taxpayers to claim missed ASCs for open tax years by filing amended returns.

Business Planning

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Research Credit - Proposed Changes

  • AMT turnoff
  • Creation of a refundable credit for start-up companies in their

first 5 years (R&D against business/payroll taxes capped at $250K per year)

  • Increase the Alternative Simplified Credit (ASC) from 14% to

20%

  • Make the ASC permanent

Business Planning

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Work Opportunity Tax Credit

  • Designed to encourage hiring from certain disadvantaged

groups (such as veterans and individuals receiving certain government benefits)

  • Generally equal to 40% of a worker’s first year wages up to

$6,000 (qualified wage cap varies by group)

Business Planning

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Special rules for qualified small business stock

  • 100% gain exclusion applies to qualified small business

stock acquired after Sep. 27, 2010, and before Jan. 1, 2014, and held for more than five years

  • Exclusion drops back to 50% for stock issued after Jan. 1,

2014

Business Planning

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Five-year recognition period for built-in gains

  • f S corporations
  • American Taxpayer Relief Act of 2012 reduced the built-in

gain recognition period to five years for 2012 and 2013 tax years

  • The recognition window reverts to 10 years beginning in

2014

Business Planning

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Section 179D energy efficient commercial building deduction

  • Energy efficient renovations and upgrades to buildings

qualify

  • Lighting and HVAC systems that meet certain energy

efficient standards often qualify

  • Maximum deduction of $1.80 times the square footage
  • The deduction expires on January 1, 2014

Business Planning

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Deducting Accrued Year-End Bonuses

  • Bonuses accrued but not paid by year-end could still be

deductible in the year services are performed if the following requirements are met:

  • The employee does not own more than 50% of the

corporation’s value; S-Corporation not eligible for accrued bonus deduction for employee-shareholders

  • The bonus is properly accrued before the end of the year
  • The bonus is paid within two and a half months of the

following tax year and the employee’s rights to the compensation are fixed by the end of the year

Business Planning

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Deducting Accrued Payments to Related Parties

  • Accrual basis taxpayers can only deduct amounts owed to cash

basis related parties in the year that the expenses are paid

  • Make sure that accrued payments are made prior to the year end
  • Related parties generally include:
  • Greater than 50% shareholders of C corporations
  • All Personal Service Corporation shareholders
  • All S Corporation shareholders
  • All partners or LLC members
  • The limitation applies not only to related parties themselves, but also

to their relatives.

Business Planning

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  • S-Corp and Partnership Basis Review
  • If planning to a loss, check if shareholders have enough basis to

take the loss

Other Y/E Considerations

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  • Employee vs. Independent Contractor
  • Repair/Capitalization Final Regulations Issues (263a)-Long awaited

Regulations issued – effective Jan. 1, 2014

  • Health Care Reform-beginning in 2015
  • Employer shared responsibility payment delayed
  • If fewer than 50 full-time employees exempt for any year
  • If at least 50 but fewer than 100 full-time employees exempt

until 2016

  • If 100 or more full-time employees, employers subject to the

employer mandate starting in 2015, with certain relaxed standards

  • State Issues

Business Planning

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Year end planning discussions with business

  • wners should include the following:
  • Changes in nature of business
  • Geographical expansion
  • Estate planning and shifting of value

Business Planning

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Questions?

THANK YOU!!