2014 Individual Year-End Notes
While we wait for Congress to revive some of the expired tax credits and deductions before the end of the year, there are some steps you can take to reduce your tax liability under the current tax laws.
Some things will be simpler this year, as the 2015 tax rates are expected to be similar to the rates in 2014. You may be able to save by accelerating deductions into 2014 and deferring income to 2015. Or, if you expect to be in a higher tax bracket in 2015, you may want to hold off on paying some deductions until 2015.
Some deductions that you may be able to control include:
Payment of state income taxes – Paying your 4th quarter state tax estimate in December rather than by the January 15th due date allows you to deduct in 2014 rather than in 2015.
Donations – If paying by check, the date the payment is mailed determines the year in which to deduct. If paying by credit card, the date it is charged to your account determines which year the deduction can be taken.
Medical expenses – If you expect to exceed the 7.5%/10% of AGI, consider having elective procedures done in 2014 or delay to 2015, depending on which year you are likely to exceed the AGI threshold.
Mortgage interest – Consider making your January payment in December to get the early write-off in 2014.
Itemized deductions – If you are borderline on whether to itemize or not, consider grouping expenses in one year so you get the itemized deduction benefit for that year, and take the standard deduction the other year. The 2014 standard deduction amounts are: $12,400 for joint returns (plus $1,200 for each person 65 or older); $6,200 for singles (plus $1,550 if 65 or older).
Required Minimum Distributions (RMDs):
If you reached age 70 ½ during 2014, you are required to start taking RMDs from your traditional IRA and certain qualified retirement plans by April 1, 2015. Future RMDs are required to be taken by December 31 each year. If you wait until 2015 to take your initial RMD, you will have two RMDs to include in income in 2015. Depending on your income situation, it might make sense to take the initial RMD in 2014. The penalty for not taking timely RMD’s is 50% of the part of the RMD that was not withdrawn on time.
If you have multiple plans requiring RMDs, each RMD is calculated separately. However, you may combine the calculated RMDs and withdraw the combined amount from just one account if you wish. If you wish to do this, make sure you communicate with the financial institutions that hold your retirement plans.
We expect that Congress will reinstate the tax break for contributions of IRAs directly to charitable organizations. In the past, the requirements were that the IRA owner be 70 ½ or older and that the distribution must be made directly from the IRA trustee to the qualified charitable organization. Prior law limited the amount donated to $100,000. The benefit is that you are not required to include the IRA distribution in your adjusted gross income.
Regarding charitable contributions, we would like to remind you of the requirement to maintain record of your contributions. You must keep the receipts from the charitable organization(s) for any single contribution of $250 or more. When contributions are less than $250 you can use bank records, credit card statements or a receipt from the organization as proof of your donation.
For non-cash donations, you must have written receipts from the organizations. You should also have a description of what was donated and when. A deduction of $5,000 or more for a non-cash item or group of items will require a signed acknowledgement from the organization and likely a written appraisal. Clothing and household items must be in good used condition or better to be deductible.
Some of the other tax breaks that have expired, but are likely to be reinstated before the end of the year include:
- Mortgage insurance premiums deduction
- State sales tax deduction (in place of State income taxes)
- College tuition deduction (college tax credits are still around)
- Educator qualified classroom expense deduction ($250)
- Accelerated depreciation/write-off of fixed asset purchases (50% “bonus” depreciation ends, and Section 179 drops from $500,000 to $25,000)
- Credit for research and development expenses
For advice or assistance with your year-end planning, please contact our office.