Year-End Tax Planning for 2014

By Greg Yoder, CPA

For the most part, 2014 has been a quiet year from a tax legislation standpoint. Most of the major changes that happened this year involved the expiration of a number of favorable tax provisions (credits, bonus depreciation, etc.) that ended at the end of 2013.

(As I write this, it now appears that most of the provisions that expired at the end of 2013 will be renewed through the end of 2014, and we will provide additional information about the extenders bill if and when it passes the Senate.)

While the inactivity/activity of Congress has made tax planning for businesses especially challenging, for individuals, the tax landscape is relatively stable. Although the increased tax rates and the net investment income tax (NIIT) that began in 2013 were unwelcome developments, they haven’t changed in 2014, and a stable tax rate structure makes planning somewhat more reliable.

Many tax planning strategies haven’t changed from prior years, but with total federal tax rates (income tax plus the NIIT) now exceeding forty percent, it’s more important than ever to do the following:

  • Evaluate the timing of income and deductions. Individuals with small businesses can often accelerate or defer the collection of income and the paying of deductions to shift taxable income to a year where they’re in a lower bracket. The timing of state income tax estimates (paying the fourth quarter estimate in December or January) will affect any taxpayer who isn’t in AMT.
  • Maximize contributions to retirement plans. This reduces both adjusted gross income and taxable income. Reducing AGI can have the effect of increasing other deductions and decreasing NIIT.
  • Consider the timing and manner of making charitable contributions. If you’re looking at making a large gift, consider making it with appreciated securities, which give you a full deduction without recognizing any gain on the appreciation of your investments. Also make sure you’re making the gift in the year where it benefits you most.
  • Take advantage of incentives that have not yet expired. Special deductions/credits for energy efficient property, electric vehicles, and educational expenses are still available but are set to expire within the next few years.

In addition to the standard strategies, there are some relatively new issues to consider:

  • The availability of IRA rollovers will become more limited beginning in 2015. In the past, taxpayers could take a rollover distribution from each of their IRAs up to once a year, provided that they contributed the amount to a new IRA within sixty days. Due to a recent Tax Court decision, starting in 2015, only one rollover per taxpayer (rather than per IRA) will be allowed each year. This change does not apply to direct trustee-to-trustee rollovers.
  • Because of higher rates and the NIIT, accumulating income in trusts is more expensive than before. Trusts reach the highest marginal tax rates — and become subject to the NIIT — at taxable income of $12,150 in 2014. In cases where trust beneficiaries are subject to lower tax rates and/or are not subject to the NIIT, trustees will want to consider making distributions so that income is taxed at a lower overall rate.

Tax planning and tax compliance are complex matters. Despite much talk about the need for tax simplification, what we mostly get is tax complication. As a result, any time you consider a tax planning strategy, you have to consider a number of factors and balance competing interests to avoid unintended, and sometimes dire, consequences. As always, Snyder Cohn is eager to help develop a plan to reduce your overall tax burden. Please get in touch with us with any questions.