December 8, 2014
We recently changed our name to Realize CPA, but everything about our firm and our commitment to providing our clients and colleagues with timely updates and proactive tax planning remains the same. As we do every year, we wanted to offer a few tax-planning ideas to consider before the end of 2014. We look forward to discussing which actions might benefit you.
Qualified Small Business Stock (QSBS) Starting this year, certain sales of QSBS may be eligible for the 75% federal exclusion on stock acquired between Feb. 18, 2009 and Sept. 27, 2010. The amount of eligible gain is the greater of $10 million or 10 times your basis in the stock. QSBS is very generally defined as original issue stock where the gross assets of the company did not exceed $50 million when the stock was issued. We would be happy to assist you in reviewing your stock holdings to determine if any would qualify for qualified small business stock treatment.
3.8 % Net Investment Income (NII) Tax You may be able to avoid this 3.8% tax by shifting income between tax years, to keep your modified adjusted gross income (MAGI) below the threshold amount ($200,000 for single or $250,000 for married filing joint). We can assist you in the review of both your income and deductions to minimize your exposure to the NII tax. For example, a strategy that can be employed to minimize the NII tax is pre-paying your state taxes before year end. NII includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties
Roth Conversion/Recharacterization You may want to consider converting your traditional IRA to a ROTH IRA before year end if you expect to be in a lower tax bracket this year or if the value of your traditional IRA assets is low. If you are interested in converting, we can assist you in determining the tax consequences or optimizing the conversion amount. If you converted earlier in the year and the value of the assets has since decreased, you can recharacterize (i.e. undo the conversion) and then reconvert at a later time. The main benefit of ROTH IRA’s is that the assets grow tax-free and there is no requirement to take minimum distributions later in life.
Loss Harvesting Consider harvesting unrealized capital losses to offset any net realized capital gains. If you own securities that have become worthless or made loans that have become uncollectible, we will want to ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction.
IRA Charitable Contribution The provision allowing direct IRA charitable gifts to public charities (limited to $100,000 per annum) had expired as of the end of 2013. There is a possibility that this may be extended with the passing of new legislation and we will update you immediately if this provision is extended.
Required Minimum Distribution If you turned 70 1/2 or older in 2014, you likely need to take a required minimum distribution from your IRA or 401(k) plan by year end. Steep penalties exist for not doing this timely. We can assist in the calculation of the required distribution.
Annual Gifting Consider utilizing the annual $14,000 gift tax exclusion. This can be made to an unlimited number of individuals with the benefit of removing these assets from your estate. In addition, the lifetime exclusion (the amount you are allowed to give in excess of the annual gift exclusion during life or at death) continues to rise and is $5,340,000 per person for 2014. We would be happy to assist with more comprehensive estate and tax planning to effectively utilize your lifetime exemption. Remember that you can pay directly for tuition, dental or medical expenses for anyone without using either the annual exclusion or lifetime exclusion.
Charitable Contributions Charitable contributions can be made in cash, stock, real estate or other various assets. They provide current tax savings (generally offsetting your highest taxed income first), can assist in asset diversification and are an opportunity to make a difference through philanthropy. Long term appreciated assets are one of the best options to consider as you get the double benefit of not paying tax on the appreciation and deducting the full market value of the asset. We can advise you on optimizing the amount of charitable giving this year and the use of charitable entities.
Pre-pay State Income Tax In certain scenarios it can be advantageous to accelerate your estimated state income tax payments. By pre-paying in December 2014 as opposed to January 2015, you will be allowed a federal deduction that may offset your current year income. While this strategy may not be beneficial if you are subject to the alternative minimum tax in the current year, you may receive a benefit related to the net investment income tax. We consider the benefits of pre-paying state taxes with all clients and can advise the best course of action.
Stock Options If you have options on high-dividend-paying stock, options with a fast approaching expiration date, or have options with an exercise price well below today’s market value, it may be time to consider exercising. When to exercise options is often a matter of personal preference based on your own beliefs in the future potential in the stock. However, there are tax considerations and we recommend consulting with us at year end to review your long-term financial goals and current tax position.
Bonus Depreciation & Section 179 Deduction (For Businesses) While, new depreciable property purchased and placed in service before the end of 2014 no longer qualifies for 50% first-year bonus depreciation, you are still allowed to expense up to $25,000 under Section 179 (available only for qualified property). We can assist in advising you on which assets are best suited for the Section 179 election.
Tangible personal property Effective January 1, 2014, all businesses that acquire, produce or improve tangible property are now required to capitalize and expense certain costs based on certain criteria. The new regulations include provisions that allow taxpayers to currently deduct some costs that were traditionally capitalized. These rules are complex and implementation requires careful review of each taxpayer’s facts and circumstances. In order to properly implement these regulations, we recommend that we assist in reviewing your business’ overall accounting procedures prior to year end.