Wealth Management Systems Inc Tax Guide. What You Need to Know About the New Rules

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1 Wealth Management Systems Inc Tax Guide What You Need to Know About the New Rules

2 Tax Guide 2015 This guide is not intended to be tax advice and should not be treated as such. Each individual s tax situation is different. You should contact your tax professional to discuss your personal situation.

3 Tax Guide QUICK REFERENCE Introduction New for 2015 Income Tax Rates Capital Gains and Dividends The Alternative Minimum Tax IRAs and Employer-Sponsored Retirement Plans Education Tax Advantages Estate, Gift, and Generation-Skipping Taxes

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5 INTRODUCTION Retirement plan contribution limits are going up. Eligibility ceilings for IRAs are being raised. Routine inflation adjustments for the alternative minimum tax come into play. Same-sex couples gain wider recognition in tax law, but some still face complicated procedures for reconciling state and federal tax obligations. Details of these changes and more are summarized in this 2015 Tax Guide. This guide can help you understand the current state of the law so you can use the best information available as you plan. Of course, before you act on anything, you should consult a tax professional about your personal situation. And keep in mind that the information in this guide is subject to change at any time under the pressure of political crosswinds and shifting legal currents. Ultimately, there can be no guarantees about what may happen with the tax code in the year ahead, so be sure you are acting only with the most definitive and current information in mind. 3

6 NEW FOR 2015 New Limits, Evolving Laws, Political Uncertainties Retirement savers can now put away up to $18,000 a year in their 401(k) and 403(b) plans, and most 457 plans too. Those aged 50 and over can add an extra $6,000 a year. The maximum amount that can be contributed to an IRA is unchanged for 2015, but the income ceilings associated with IRA contributions have been raised. Exemption amounts for the alternative minimum tax are going up to $53,600 for a single taxpayer and $83,400 for married taxpayers filing jointly. Federal Tax Rules for Same-Sex Couples Evolve Legal recognition of same-sex marriage grew broader in 2014 as lower courts struck down more than half a dozen state bans and the United States Supreme Court declined to intervene. By early autumn, a total of 29 states were giving couples in same-sex marriages the same tax treatment as other married couples. However, many states use federal tax returns as the basis for various state tax filings. States that do not recognize same-sex marriage may not allow the use of information from joint federal tax returns for their state tax purposes in Concerned couples should consult a tax advisor knowledgeable about their state s filing requirements to determine their local filing obligations. 4

7 NEW FOR 2015 State-Related Issues Also Complicate Retirement Planning Same-sex married couples receive full parity in federal laws related to employer-sponsored retirement savings plans. Any couple with a valid marriage license should receive equal treatment from any retirement plan as regards beneficiary designations, rights of survivorship, joint annuities, qualified domestic relations orders, et cetera. The same does not apply to Social Security. While Social Security taxes are assessed uniformly across the country, full equality cannot extend to Social Security benefits without further legal changes. Under rules that trace back to the creation of the Social Security system, Social Security can only pay married-couple benefits to a couple residing in a state that recognizes their marriage. Keep in mind that some state authorities are reportedly recognizing same-sex marriages licensed in other jurisdictions even though there may be rules against performing same-sex marriages within their states. Political Risks in 2015 A number of long-standing individual tax breaks were renewed for 2014 just as the year drew to a close. Qualified taxpayers will be able to deduct state and local sales taxes and exclude the financial gains from certain kinds of mortgage forgiveness on their 2014 tax returns. Also extended were tax breaks for some commuter expenses and incentives to encourage charitable distributions from IRAs, among other things. Awaiting action from Congress in 2015 are proposals to temporarily extend, make permanent, or modify the dozens of breaks that were covered by the 2014 measure. It is possible that there will be changes enacted in 2015 that could be applied retroactively, which could potentially complicate tax planning during the year and even disrupt estimated tax payments and other filings. 5

8 INCOME TAX RATES Each tax rate indicated below applies to a tier of your taxable income, with the lowest portion taxed at 10%, the next threshold taxed at 15%, and so on. Keep in mind that the indicated taxable income levels are the amounts that remain after adjustments, exemptions, and deductions. Many exemptions and deductions are gradually phased out for taxpayers at higher income levels. Rates on Ordinary Income for the 2015 Tax Year Married Filing Jointly and Qualifying Surviving Spouses $0 $18,450 10% of the taxable income $18,451 $74,900 $1, % over $18,450 $74,901 $151,200 $10, % over $74,900 $151,201 $230,450 $29, % over $151,200 $230,451 $411,500 $51, % over $230,450 $411,501 $464,850 $111, % over $411,500 $464,851 and higher $129, % over $464,850 Heads of Households $0 $13,150 10% of the taxable income $13,151 $50,200 $1, % over $13,150 $50,201 $129,600 $6, % over $50,200 $129,601 $209,850 $26, % over $129,600 $209,851 $411,500 $49, % over $209,850 $411,501 $439,000 $115, % over $411,500 $439,001 and higher $125, % over $439,000 Unmarried Individuals $0 $9,225 10% of the taxable income $9,226 $37,450 $ % over $9,225 $37,451 $90,750 $5, % over $37,450 $90,751 $189,300 $18, % over $90,750 $189,301 $411,500 $46, % over $189,300 $411,501 $413,200 $119, % over $411,500 $413,201 and higher $119, % over $413,200 6

9 CAPITAL GAINS AND DIVIDENDS Capital Gains The federal tax rate on long-term capital gains typically is determined by the type of asset and your marginal ordinary income tax rate. For common financial investments, the maximum rate on long-term gains is 20% and applies to those in the top income tax bracket. Individuals in the 25% to 35% brackets will be subject to a 15% long-term capital gains rate. Those in the 10% and 15% brackets have a 0% capital gains rate. For certain investment real estate, business, and collectible assets, gains could have different tax rates. As a general rule, long-term capital gains rates apply to gains resulting from the sale of assets held for more than one year. Short-term capital gains on assets held for one year or less are taxed at ordinary federal income tax rates. Dividends Qualified dividends are taxed at the taxpayer s applicable capital gains tax rate. While a dividend must meet certain timing and corporate residency requirements to be a qualified dividend, most dividends received by individuals will be qualified dividends and be eligible for the capital gains tax rates. Tax Rates for Qualifying Dividends and Common Long-Term Capital Gains Marginal Ordinary Base Qualifying Potential Rate If Also Income Tax Rate Dividend/Long-Term Subject to the Net Capital Gains Rate Investment Income Tax 0% to 15% 0% 0% 25% 15% 18.8% 28% 15% 18.8% 33% 15% 18.8% 35% 15% 18.8% 39.6% 20% 23.8% Net Investment Income Tax A 3.8% tax applies to net investment income, which generally includes interest, dividends, royalties, nonqualified 7

10 annuities, rents (and other passive activity income), capital gains from the sale of property other than that used in an active trade or business, and income from a trade or business that is a passive activity or in the business of trading financial instruments and commodities. In general, the tax applies to single taxpayers with a modified adjusted gross income (MAGI) of $200,000 or more and to those who are married and filing jointly with a MAGI of $250,000 or more. MAGI for purposes of the net investment income tax will be the same as adjusted gross income for taxpayers living in the United States for the entire tax year. Importantly, net investment income does not include distributions from IRAs or qualified retirement plans, qualified annuity payouts, or income from tax-exempt municipal bonds, among other items. But, except for Roth account distributions, retirement plan proceeds and annuity income are generally included in the MAGI calculation, so a hefty plan payout can trigger liability on your taxable investment assets if it pushes you over your MAGI threshold. Among the possible strategies for managing your exposure: converting your traditional IRA or 401(k) account to a Roth and reallocating your existing taxable fixed-income portfolio to tax-advantaged municipal bonds. But be aware that not all municipal bonds necessarily qualify for the exemption, and some may also trigger the alternative minimum tax (AMT). And remember that the costs of a Roth conversion may outweigh any potential benefit from reduced net investment income tax exposure. Additional Medicare Tax Taxpayers whose income level makes them liable for the net investment income tax on unearned income may also be liable for a 0.9% tax on earned income above the same thresholds. This additional Medicare tax will be withheld from wages and salaries over $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly. Actual tax liability will be calculated in your tax return. 8

11 THE ALTERNATIVE MINIMUM TAX The federal alternative minimum tax (AMT) was established more than 30 years ago to ensure that wealthy Americans couldn t use unusually large tax deductions and business expense subsidies to avoid paying income taxes. In 2013, inflation adjustments became a permanent part of the AMT formula, creating a degree of certainty about potential AMT exposure each year. For income earned in 2014 and reported on tax returns filed this year, the basic exemption amount is $52,800 for individuals and $82,100 for married taxpayers filing jointly. For income earned during 2015, the exemption amounts are $53,600 for singles and $83,400 for married taxpayers filing jointly. AMT Exemption Single filers Joint filers Married filing separately 2014 $52,800 $82,100 $41, $53,600 $83,400 $41,700 Planning Tip: If you re subject to the AMT, you may face stricter limits on medical expense deductions, use of tax credits, and tax-exempt interest. Consult your tax professional for information about the AMT and how it relates to your situation. 9

12 IRAS AND EMPLOYER-SPONSORED RETIREMENT PLANS Annual contribution and income limits for IRAs and employer-sponsored retirement plans are determined annually in October based on the published rate of inflation for the previous year. Investors aged 50 and older get a bonus: an annual catch-up contribution that permits them to potentially accumulate even more. IRA Contribution Limits Tax Year Maximum Contribution Amount $5,500 $5,500 Indexed to inflation Catch-Up Contribution $1,000 $1,000 $1,000 Planning Tip: Taxpayers at any income level are now permitted to convert a traditional IRA to a Roth IRA. The conversion requires income taxes on the amount being converted in the year of the conversion. Whether a conversion is right for you will depend in part on the amount of time you plan to leave the assets invested. The further you are from retirement, the longer your earnings can grow tax free, and the more time you will have to compensate for the tax bill for conversion. You can make your 2014 contribution to a traditional or Roth IRA anytime until April 15, For the 2015 tax year, your contribution can be made anytime between January 1, 2015, and April 18, Please keep in mind that income limits discussed below refer to the modified adjusted gross income as calculated for Roth and traditional IRA purposes. Traditional IRA Contribution Limits Contributions to a traditional IRA may be tax deductible, depending on your income level and whether or not you (or your spouse) are covered by an employer-sponsored retirement plan at work. 10

13 IRAS AND EMPLOYER-SPONSORED RETIREMENT PLANS Filers who are not covered by an employer-sponsored retirement plan (and, if married, whose spouses are also not covered) may deduct their contributions to a traditional IRA regardless of their income level and filing status. All other filers may only deduct traditional IRA contributions if their income falls below certain limits. (In each category, the deduction value phases in gradually below the absolute limit.) For 2014 traditional IRA contributions, tax filers who are covered by employer-sponsored plans cannot deduct contributions if the modified adjusted gross income (MAGI) exceeds $70,000 for those filing as single or head of household, $116,000 for married taxpayers filing jointly, and $10,000 for married taxpayers filing separately. For 2015 traditional IRA contributions, tax filers who are covered by employer-sponsored plans cannot deduct contributions if the MAGI exceeds $71,000 for those filing as single or head of household, $118,000 for married taxpayers filing jointly, and $10,000 for married taxpayers filing separately. For a married taxpayer filing jointly who is not covered by a plan but whose spouse is covered, the MAGI limit for 2014 contributions is $191,000. For a married taxpayer filing separately, the limit is $10,000. For 2015 contributions, the limit for married taxpayers filing jointly is $193,000, and for married taxpayers filing separately, the limit is $10,000. Roth IRA Contribution Limits Contributions to a Roth IRA also have limitations based on income and filing status. The amount of the permitted contribution is phased in below these limits. For taxpayers filing as single or head of household, the Roth qualification MAGI limit is $129,000 in For those married filing jointly, the limit is $191,000. For those married but filing separately, the limit is $129,000 if you did not live with your spouse at any time during the year; otherwise, it is $10,

14 IRAS AND EMPLOYER-SPONSORED RETIREMENT PLANS For taxpayers filing as single or head of household, the Roth qualification MAGI limit is $131,000 in For those married filing jointly, the limit is $193,000. For those married but filing separately, the limit is $131,000 if you did not live with your spouse at any time during the year; otherwise, it is $10,000. Contribution Limits for Employer-Sponsored Retirement Savings Plans If you are eligible to participate in an employer-sponsored retirement plan, you may want to determine the maximum you are permitted to contribute on a pretax basis and whether a catch-up contribution may apply. The amounts in the accompanying table are government maximums, but your employer may impose lower limits. SIMPLE Plans Individuals who contribute to SIMPLE plans for small-business owners and employees may make a maximum annual contribution of $12,500 in Future limits may be indexed to inflation. Participants who are age 50 and older may be able to make a catch-up contribution of $3,000 in (k), 403(b), and 457 Plan Limits Maximum Catch-Up Tax Year Contribution Amount Contribution 2014 $17,500 $5, $18,000 $6, Indexed to inflation Indexed to inflation 12

15 EDUCATION TAX ADVANTAGES Families who hope to send children to college, as well as those paying education expenses at the elementary and secondary levels, may benefit from the tax rules outlined below. Coverdell Education Savings Accounts Earnings on investments in Coverdell accounts are not taxed, and withdrawals are federally tax free as long as they are used for qualified education expenses. A child under 18 may be given a total of up to $2,000 per year. The contribution deadline is the same as that for traditional and Roth IRAs the tax-filing deadline of the following year. (You have until April 15, 2015, to contribute for the 2014 tax year, and contributions for 2015 can be made anytime between January 1, 2015, and April 18, 2016.) Single taxpayers with modified adjusted gross incomes of more than $110,000 and joint filers with incomes in excess of $220,000 are not eligible to contribute to Coverdell accounts. 529 Plans These college savings accounts permit investors to accumulate aggregate amounts of up to $200,000 or more for higher education, depending on the plan. Withdrawals used to finance qualified higher education expenses are federal tax free. There are no income thresholds and typically no annual contribution limits, although contributions of more than preset limits could potentially trigger the federal gift tax. Investors can transfer assets from one 529 plan to another 529 plan without paying taxes on the distribution if the second plan is for the benefit of the same beneficiary or a different beneficiary who is a member of the same family, subject to some limitations. Planning Tip: Money in a 529 plan is removed from your taxable estate. You may contribute five years worth of gifts all at once, or $70,000 per beneficiary, without triggering the federal gift tax. To meet this condition, you must not provide additional gifts to the same beneficiary during the five-year period. However, should the account owner die within a five-year period of the accelerated gift, a prorated portion of the gift will be included in the gross estate. 13

16 ESTATE, GIFT, AND GENERATION-SKIPPING TAXES The maximum estate tax rate is 40%. The base exemption amount is $5,430,000 for each individual and may be adjusted for inflation in future years. Estate assets may be transferred without tax to a surviving spouse who is a U.S. citizen. A surviving spouse may also inherit any unused applicable exclusion amount. For accounting purposes, the limits applied to estate taxes can be unified with those applied to gift taxes. Gifts totaling $14,000 to a single beneficiary in a single year are considered tax free. Within certain limits, gifts above the tax-free amount may be included in the taxpayer s estate tax exemption rather than being subjected to immediate taxation. The tax rate and exemption amounts for the generationskipping tax (GST) are the same as those for the estate tax. However, any unused GST exemption cannot be transferred to a surviving spouse. Gift Tax Taxpayers are allowed to make a fixed amount of gifts tax free each year. The tax-free annual exclusion amounts indicated in the accompanying table apply individually to each combination of giver and recipient. For example, each grandparent can give a child or grandchild the full exclusion amount tax free each year. In the same vein, a friend or family member can give each child in a family a gift valued at the maximum exclusion amount without creating a gift tax liability. 14

17 ESTATE, GIFT, AND GENERATION-SKIPPING TAXES Estate Taxes Maximum rate Exemption % $5.34 million 2015* 40% $5.43 million *Exemption amounts may be adjusted for inflation in future years. Gift Taxes Annual tax-free gift per recipient Maximum rate (on amounts above the applicable exclusion amount) Applicable exclusion amount 2014 $14,000 40% $5.34 million 2015* $14,000 40% $5.43 million *Exclusion amounts may be adjusted for inflation in future years. 15

18 Work With a Professional It is important to remember that tax laws are extremely complex and fluid. Many laws can even be altered retroactively. This makes it especially vital that you discuss your personal situation with your tax professional before taking any action. 16

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20 TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. All rights reserved. TD Ameritrade, Inc. and Wealth Management Systems Inc. are separate unaffiliated companies and are not responsible for each other s services or policies. Reprinted with permission. TD Ameritrade does not provide tax advice. Clients should consult with a tax advisor with regard to their specific tax circumstances Wealth Management Systems Inc. All rights reserved. Reproduction in whole or in part is prohibited without the express permission of Wealth Management Systems Inc. Contact us at or WMSI (9674).

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