2014 Year-End TAX PLANNING GUIDE

Transcription

1 2014 Year-End TAX PLANNING GUIDE

2 Contents Introduction How to Use This Guide Which Tax Breaks Are in Limbo? TAX PLANNING FOR INDIVIDUALS Personal Income Tax Net Investment Income Tax and Additional Medicare Tax Estate and Gift Planning Charitable Giving Retirement Planning Wealth Management International Considerations Health Care Reform for Individuals TAX PLANNING FOR BUSINESS OWNERS & BUSINESSES Health Care Reform for Employers Foreign Account Tax Compliance Act Tangible Property Regulations Depreciable Real Estate and Business Equipment Business Credits Employee Benefits Flow-Through Entity Structure: Business Owner Considerations Exit Planning Sales and Acquisitions 2015 PREVIEW Contact Us MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 2

3 Introduction A Familar Landscape for 2014 It s often said that no news is good news, and as the season for year-end tax planning approaches, more of the same means that taxpayers will, at the very least, know what to expect. There s been very little legislative change this year, and now that Congress and President Obama have passed the Tax Increase Prevention Act of 2014 (TIPA), which was signed into law on December 19, certain tax credits, deductions, and other opportunities that expired on December 31, 2013, will be available to taxpayers for another filing season. On December 31, 2014, these provisions will expire once again, leaving the question open as to whether the provisions will be available again for the 2015 tax year. That said, sound tax planning is essential to effective wealth management, and in today s tax environment you ll still want to consider a variety of strategies so that you re well positioned regardless of tax rule outcomes. Among the issues most likely to affect taxpayers this year are: Election-year delays and tax law changes. was an election year for the House, a third of the Senate, and many governorships and state legislatures, it was unlikely any tax law changes would come until after the general election on November 4. Sure enough, the second half of December has brought with it TIPA. (See the list of extended provisions on page 5.) The net investment income tax (NIIT) and additional Medicare surtax. Now in their second tax season, the rates and thresholds for these taxes on higher-income individuals remain the same. Armed with a better bearing on each of the two, taxpayers and CPAs alike should be able to make better use of the associated planning opportunities for the 2014 tax year. (See page 11 for planning tips on the NIIT and additional Medicare surtax.) Health insurance provisions for individuals and businesses. The Affordable Care Act continues to evolve, impacting both individuals and businesses. Though the employer mandate was delayed until 2015, individuals have been required to have health insurance since January 1, Those who did not could face a penalty of $95 or 1 percent of their gross income, whichever amount is greater. (See page 18 for individual health care requirements and page 20 for business health care requirements.) In this guide we look at the above items and others with an eye toward planning opportunities. With the help of this guide and your Moss Adams advisor, you should find opportunities to pay less tax for the 2014 tax year. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 3

4 How to Use This Guide The two checklists contained in this guide one for individuals, one for business owners and their businesses discuss tax planning opportunities available to you for the 2014 tax year. Taking one or a number of these key actions could help you hold on to more of what you ve earned. We encourage you to talk with your Moss Adams advisor and evaluate your options well in advance of your filing. While it can be tempting to put off thinking about taxes until the last minute, some of the tactics discussed here take time to implement, and your window of opportunity grows smaller as the tax year-end approaches. And though you may reference this guide only during tax planning season, it can also be a helpful year-round tool, since certain topics such as flow-through entity structure planning (see page 24) warrant longer-term attention. Staying actively involved in these and other underlying areas of tax planning will keep you in a position to preserve and create longer-term wealth for yourself and your family. Finally, the strategies discussed in this guide are based on current federal tax law. State taxes should also be considered since the tax laws of many states differ from federal tax laws. In light of the ever-evolving tax code, we suggest you visit to stay abreast of any changes. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 4

5 Which Tax Breaks Are in Limbo? With increasing predictability, we see Congress allow tax breaks to expire and then extend them for one or two more years, making it challenging for both individual and business taxpayers to plan ahead. Congress has now extended through 2014 many of the tax breaks that expired in This situation is likely to repeat itself in future tax years 2015 included and since there s no guarantee that Congress will act in any given year, the best strategy is to understand how your taxes will be affected in either scenario and be prepared to pursue your preferred strategy if the opportunity arises. See the chart below for a list of tax breaks that were extended under TIPA. Previously Expired Tax Breaks That Have Been Renewed for the 2014 Tax Year* Individuals Charitable Planning Businesses Energy Community Deduction for state and local sales taxes Above-the-line deduction for certain expenses incurred by teachers Above-the-line deduction for qualified tuition and related expenses Deduction for mortgage insurance premiums (deductible as qualified interest) Exclusion of discharge of principal residence indebtedness from gross income Enhanced charitable deduction for contributions of food inventory Tax-free distributions from individual retirement accounts (IRAs) to charitable organizations Basis adjustment to the stock of S corporations making charitable contributions of appreciated property Special rules for contributions of certain capital gain real property for conservation purposes Research and experimentation credit Work Opportunity Tax Credit Increased limitation of $500,000 in Section 179 expenses, $2 million phaseout threshold, and expanded definition of Section 179 property Bonus depreciation Special rules for qualified small business stock Reduction in S corporation recognition period for built-in gains tax Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation Fifteen-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements Credit for construction of energy-efficient new homes Energy-efficient commercial buildings deduction Construction date for eligible facilities to claim the production tax credit or wind credit Credit for energy-efficient appliances Incentives for alternative fuel and alternative fuel mixtures New markets tax credit Empowerment zone tax incentives *Source: Joint Committee on Taxation, List of Expiring Tax Provisions , January 10, 2013 MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 5

6 TAX PLANNING FOR INDIVIDUALS Individuals who are also business owners must often take the tax consequences of their business into consideration in their individual tax planning strategy. Be sure to review Tax Planning for Business Owners and Businesses (starts on page 19) Personal Income Tax Capital Gains Deductions Alternative Minimum Tax Stock Option Planning College Education Planning Others Net Investment Income Tax and Additional Medicare Tax Estate and Gift Planning Lifetime Gifts Low Interest Rate and Valuation Opportunities Develop or Update Your Estate Plan Charitable Giving Appreciated or Depreciated Property Timing of Larger Charitable Gifts Charitable Giving as Part of Your Overall Estate Plan Retirement Planning Roth IRA Conversions New IRA Rollover Rules Effective 2015 IRAs Not Protected in Bankruptcy Child s Earned Income Wealth Management Investment Management Investment Strategy Personal Financial Planning Insurance International Considerations Health Care Reform for Individuals Substantiating Health Coverage in 2014 State Health Insurance Marketplaces Individual Shared Responsibility Provision MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 6

7 Personal Income Tax For most taxpayers, ordinary income tax rates in 2014 will remain about the same as in Federal Income Tax Brackets Single Married Filing Jointly Married Filing Separately Head of Household MARGINAL RATE Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950 10% $9,075 $36,900 $18,150 $73,800 $9,075 $36,900 $12,950 $49,400 15% $36,900 $89,350 $73,800 $148,850 $36,900 $74,425 $49,400 $127,550 25% $89,350 $186,350 $148,850 $226,850 $74,425 $113,425 $127,550 $206,600 28% $186,350 $405,100 $226,850 $405,100 $113,425 $202,550 $206,600 $405,100 33% $405,100 $406,750 $405,100 $457,600 $202,550 $228,800 $405,100 $432,200 35% $406,750 and above $457,600 and above $228,800 and above $432,200 and above 39.6% MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 7

8 2014 Top Federal Tax Rates Ordinary earned income 39.6%* tax and the 3.8 percent net investment income tax you would otherwise have incurred had the assets been sold. Deductions Net investment income and passive income** 43.4% Long-term capital gains 23.8%*** Consider accelerating or deferring expenditures to take full advantage of deductions, since your deduction will be reduced or lost if your adjusted gross income (AGI) exceeds a certain threshold. Qualified dividends 23.8%*** Estate and gift tax 40.0% *Medicare surcharge of 0.9 percent will also apply to earned income (wages and income from self-employment) where earned income is over $200,000 (for single filers) or $250,000 (for joint filers) **Includes interest, dividends, royalties, net rental income, and other passive income ***Includes 3.8 percent surtax on net investment income and certain items of passive income with adjusted gross income over $200,000 (single filers) or $250,000 (joint filers). Capital Gains The tax rate for capital gains and dividends remains at 20 percent (23.8 percent with NIIT) if the taxable income exceeds $457,600 for a married couple filing jointly ($228,800 if the tax return is filed separately), $432,000 for heads of household, or $406,750 for single filers. For taxpayers with taxable income below those thresholds, the capital gains rate remains at 15 percent (18.8 percent with NIIT). With that in mind, it s a good idea to: Review unrealized loss positions within investment accounts and consider realizing the losses. Consult with your investment advisor for tax-loss harvesting strategies and to rebalance your investment portfolio with an eye toward incorporating additional taxefficient investments. Bunch medical expenses into tax years when they ll exceed 10 percent of your AGI (or 7.5 percent of your AGI if you re over age 65). These medical expenses are not reduced by the itemized deduction phaseout. Consider paying your fourth-quarter estimated state income tax payment and real estate property tax in December 2014 or January 2015, depending on which year provides the best income tax benefit. In certain instances deferring state income taxes and real estate property taxes to the following year may make the payment subject to penalties; however, the value of the deduction, if planned properly, could more than offset these penalties. Alternative Minimum Tax The AMT applies to those who might otherwise pay little or no regular tax because of the use of certain deductions. You ll need to pay AMT if it results in a higher tax liability than your regular income tax would. When it comes to calculating AMT, many items are not deductible, and in fact they only increase your risk of having to pay AMT instead of regular income tax. A combination of the following factors which will vary in effect depending on your individual tax situation could trigger an AMT liability: Large deductions for state and local income or sales tax (particularly in high-tax states such as California and Oregon) If you plan to make charitable donations, consider donating appreciated capital gain assets that have been held for more than one year rather than cash. By doing so, you could receive a charitable deduction for the full fair market value of the assets, avoiding the capital gains A large portion of total income from long-term capital gains The exercise of incentive stock options (ISOs) Personal property or real estate taxes MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 8

9 Investment advisory fees Stock Option Planning Accelerated depreciation adjustments and related gain or loss differences Employee business expenses Tax-exempt interest on certain private activity bonds Interest on home equity loans not used to build or improve your residence To reduce your AMT exposure: Taxpayers perpetually subject to AMT because of deductions should carefully consider the deferral of your payments to the period that provides the greatest tax benefit. Common examples include the timing of property tax payments or fourth-quarter state income taxes. If you re planning to exercise ISOs, consult your Moss Adams advisor to avoid unexpected tax consequences, since the exercise might trigger AMT liability and increase your overall tax liability. (See the following section for additional guidance.) You can potentially mitigate the impact of AMT by accelerating income into the AMT year when your regular tax and AMT would be the same. You ll pay tax sooner, but your effective tax rate will be only 26 or 28 percent on the accelerated income, compared to 39.6 percent when you re not subject to AMT. Assuming you re not already in AMT, consider exercising any incentive stock options up to the AMT crossover point the point at which you ll begin to pay AMT on any additional ISO exercises. By purchasing stock only up to the crossover point, you re essentially exercising those shares tax-free. But exercise any more, and you ll end up paying AMT. If your ISO is for a publicly traded stock, the stock price has gone down, and it doesn t look like it will recover soon, consider selling the stock. This will trigger the disqualifying disposition that makes your gains taxable as ordinary income, freeing you from paying AMT on the spread when you exercised. This works best when done within the same tax year (that is, when you exercise early in the year and disqualify by year-end if the stock goes down). If you expect to be subject to AMT for 2014 and don t expect any AMT credit carryforward, consider selling nonqualified stock options. The accelerated ordinary income may be taxed at 28 percent (the AMT marginal rate) compared to 39.6 percent for taxpayers in the highest marginal federal tax bracket. Plus, all future appreciation will be considered a capital gain. Be sure to weigh your potential tax savings against the opportunity cost of accelerating the income, taking into account the time value of money. If you anticipate paying AMT and plan to either purchase a new residence or make improvements to your current residence, consider obtaining the maximum mortgage available if you might otherwise need to borrow the funds later on. Under AMT rules, interest expenses are deductible on only the debts you incur to acquire, construct, or rehabilitate a residence. Additionally, interest expenses on second mortgages are deductible only if they re used for substantial improvements to an existing residence. If you ve received an option grant subject to vesting restrictions and the value of the shares is still equal to the grant price (or strike price), consider your ability to exercise early and start the capital gains holding clock. Don t forget to file an 83(b) election form with the IRS if you do choose early exercise. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 9

10 College Education Planning The American Opportunity Tax Credit has been extended and will be available through The credit, available for the first four years of education, has more liberal income limitations than prior education credits and provides for a portion of the credit to be refundable. If you re paying for postsecondary education and aren t eligible for the American Opportunity Tax Credit, you may be still eligible for the lifetime learning credit or the tuition and fees deduction. Consult your Moss Adams advisor to determine your eligibility. Section 529 accounts can be used to accumulate funds for college-related expenses. Appreciation of the investments within the account is tax-free for qualified distributions. If college funds are currently maintained in taxable accounts, it may make sense to shift these funds to a Section 529 account where they won t generate future taxable income. Others Energy incentives. Until 2016 the Residential Energy Efficient Property Credit is available to taxpayers that install certain energy-efficient property, such as photovoltaic panels and solar water heaters. The credit can be used to offset both regular tax and AMT, and any unused credit can be carried forward to future years. Electric-drive vehicles. Federal and state incentives exist for the purchase of electric-drive and plug-in hybrid electric vehicles. When considering your next vehicle purchase, be sure to consider these incentives along with the potential fuel savings (and other nonfinancial benefits) in evaluating your decision. Qualified small business stock gain exclusion. IIf you sell qualified small business stock, you can exclude 100 percent of the gain from the sale if the stock was acquired after September 27, 2010, and before January 1, 2015, and you have held it more than five years. For stock acquired before or after that period, the percentage of the gain exclusion is 50 percent. Stay tuned if you reside in a state where the same-sex marriage is not yet recognized, since many states may be required to recognize it in the near future. Same-sex married couples in jurisdictions that recognize same-sex marriage are to be treated as married for federal tax purposes regardless of where they reside, effectively extending federal marriage-related benefits to same-sex married couples in all states. Planning opportunities include: Consider whether filing a joint 2014 return would allow you to take better advantage of combined income, deductions, credits, and rates. Amend your estate plans and estate tax returns to include current estate and gift tax provisions. Stretch distributions from a deceased spouse s qualified retirement plan to minimize taxes in any one year and avoid a big spike in your tax bills. Deduct alimony paid to a spouse or former spouse. Understand the opportunities available to same-sex married couples through employee benefit programs, the Affordable Care Act, and Social Security, and incorporate these into your joint tax planning strategy. If you re contemplating marriage, plan for its impact on your income tax in advance. Net Investment Income Tax and Additional Medicare Tax Many higher-income taxpayers will be subject to the NIIT and the additional Medicare tax, which came into law in You may be subject to both, but not on the same type of income. Now that we re heading into the second year of these taxes and there s a better understanding of each, taxpayers and CPAs alike should be able to make better use of the associated planning opportunities for the 2014 tax year. Tax issues for gay and lesbian married couples. Same-sex marriage is still in limbo in a number of states, and much will depend on how the higher courts rule. The 3.8 percent tax on net investment income applies when a taxpayer s modified adjusted gross income (MAGI) MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 10

11 exceeds a threshold of $200,000 for single filers or $250,000 for married couples filing jointly. Created by the Health Care and Education Reconciliation Act of 2010, the NIIT applies to US citizens and residents. (The tax also applies to estates and trusts, but for these entities the threshold is only $12,150.) If a taxpayer s MAGI exceeds the threshold and includes net investment income (see table below), the NIIT equals 3.8 percent of the lesser of the taxpayer s net investment income or the amount by which the taxpayer s MAGI exceeds the threshold. Note that the NIIT on individuals is not indexed for inflation, so the above thresholds for 2014 remain the same as in This means that with each passing year, inflation alone will cause more and more taxpayers to pay this tax. Net investment income includes interest, dividends, capital gains, rents and royalty income, nontrade or nonbusiness income, and any other passive income (meaning the taxpayer doesn t materially participate in the business). Certain types of income are excluded from net investment income, including wages, self-employment income, active trade or business income, retirement plan distributions (from an IRA, Roth IRA, or other qualified plan), unemployment compensation, Social Security benefits, alimony, interest from tax-free bonds (such as municipal bonds), and Alaska Permanent Fund Dividends. The 0.9 percent additional Medicare tax applies to Federal Insurance Contributions Act wages and self-employment income exceeding $200,000 for single filers and $250,000 for married couples filing jointly. Like the NIIT, the additional Medicare tax is not indexed for inflation, so increasing numbers of taxpayers will eventually pay this tax Individual Thresholds for NIIT and Additional Medicare Tax* 3.8% NIIT (on MAGI) 0.9% Additional Medicare Tax (on Wages and Self-Employment Income) Single $200,000 $200,000 Married filing jointly $250,000 $250,000 Married filing separately $125,000 $125,000 Head of household (with qualifying person) Qualifying widow or widower with dependent child *Inflation indexing does not apply to thresholds $200,000 $200,000 $250,000 $200,000 To limit your tax exposure to the NIIT: Higher-income taxpayers should evaluate their liability for both the NIIT and the additional Medicare tax. If you expect to be subject to one or both taxes, you may want to adjust your withholding or estimated tax payments to account for the increase. In light of your anticipated income and tax bracket, consider basing your decision to defer or accelerate income at the end of 2014 or beginning of 2015 on the best use of your deductions and losses between the two years. Although a payment may not be required yet, consider prepaying state income taxes if they will help reduce your net investment income and thereby reduce your NIIT. Be careful, though: If you don t expect to be in AMT in 2015, you might benefit more from a state tax deduction next year. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 11

12 Rebalance your investment portfolio to include municipal bond investments, growth-oriented stocks that pay out lower dividends, and investments (such as in real estate, energy, and natural resources) that produce income sheltered by depreciation or depletion. Maximize your contributions to qualified retirement plans to reduce your MAGI. Note that distributions from retirement plans such as an IRA or 401(k) aren t subject to the NIIT. Use like-kind exchanges with rental or business real estate to defer triggering taxable gains. Sell qualified assets on the installment method to spread out gains. Pay special attention to how your activities are classified (active or passive) and grouped with other activities, since passive activity income is considered investment income for purposes of the NIIT. Look into ways you can materially participate in a trade or business to reduce your NIIT exposure. You might, for example, be able to group certain activities, increase the amount of time you devote to a particular activity, or restructure entities. Consider gifting income-producing assets to children. While this won t allow you to avoid the kiddie tax on your children s income, your child may avoid paying the tax on up to $200,000 of net investment income. Trustees should consider whether net investment income left in the trust will be subject to the NIIT and, if so, whether it would be better to distribute the income to beneficiaries with a MAGI below the applicable threshold such that the beneficiaries won t be subject to the NIIT. Business owners with self-employment income on their individual income tax returns might want to consider incorporating and electing to be taxed as an S corporation. While you d need to take a salary for the value of your service to the business, pass-through income from an S corporation that conducts active trade or business isn t considered net investment income, and owners can take distributions of previously taxed profits that aren t subject to tax. Furthermore, business owners conducting business using a single-member LLC can elect to be taxed as an S corporation and receive this same tax treatment. There are, however, significant federal and state tax and nontax issues to consider when changing from one form of entity to another, so review any such change carefully with your Moss Adams advisor. EXAMPLE A single taxpayer has $100,000 in net investment income and $300,000 in wages a total of $400,000 in MAGI. How much NIIT and additional Medicare tax will she have to pay? To calculate her additional Medicare tax, we begin with her wages, $300,000, and subtract $200,000, the single-filer threshold. This results in $100,000 in income above the threshold. Multiplied by the 0.9 percent tax, her Medicare surtax liability is $900. To calculate her NIIT liability, we begin with $400,000 (her MAGI) and subtract $200,000 (the single-filer threshold). This gives us $200,000. But the tax is based on the lesser of that amount or her $100,000 in net investment income. We d use the $100,000 in net investment income, multiplied by the 3.8 percent tax, for a total liability of $3,800. All together, her Medicare tax and NIIT liabilities total $4,700. Estate and Gift Planning With permanent rates now in effect for estate, gift, and generation-skipping transfer (GST) taxes, estate planning may seem less challenging. For example, the American Taxpayer Relief Act made exemptions and rates for these taxes permanent, indexing some for inflation. It also made the portability of estate exemptions between married couples permanent. But keep in mind that this permanence is relative in the tax world it means only that there are no expiration dates. Congress could still pass legislation to alter today s rates and rules. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 12

13 Lifetime Gifts In 2014 there have been no substantial changes in federal estate or gift tax laws. The amount you can give during your lifetime without incurring any gift tax has increased slightly for inflation and is currently set at $5.34 million for 2014 (with an annual exclusion of $14,000 per recipient). This amount will be indexed for inflation annually. The gift tax rate on gifts greater than $5.34 million is 40 percent. If you plan to give, consider the following methods for reducing your tax exposure: Take full advantage of the $14,000-per-recipient annual exclusion by giving assets that are aligned with your cash flow needs and long-term estate planning goals. Remember that a spouse can also gift $14,000 per recipient. When considering lifetime gifts above the annual exclusion, pay close attention to proper planning. For example, should the gifts be in cash or property? Outright or in trust? Should you give the entire asset now, or should it be given over time? How should the transfers be completed? And how can your family best utilize the step-up in asset basis for your estate? Your Moss Adams advisor can help you chart a tax-efficient course of action for your individual needs. Consider state inheritance tax issues as part of your estate and gift planning process. Many states have an estate tax of their own, and the exemption amount is often much less than the federal amount ($5.34 million). This could create a situation where you might not owe federal estate tax but do owe it to the state you live in. Low Interest Rate and Valuation Opportunities Applicable federal rates (AFRs), which are the minimum interest rates that must be charged for bona fide loans between related parties, remain at generally historic lows. As such, it may be possible to refinance loans between family members or with a closely held business, significantly reducing interest payments. The combination of the $5.34 million gift tax exemption and, again, AFRs being at generally historic lows creates an opportunity to transfer large amounts of wealth to your heirs through the use of leverage and certain types of trusts. These structures are complex, so consult with a Moss Adams advisor as well as your estate attorney to determine how and whether you could benefit from this type of planning. We re starting to see the value of assets rise. So if you re holding assets you believe will increase in value quickly, it might be advantageous to make a lifetime gift to (or a lifetime sale for) your beneficiaries now, before the values jump up significantly. Your Moss Adams advisor can evaluate your assets and help you determine whether this strategy makes sense for your individual situation. Develop or Update Your Estate Plan Understand your goals and the effect of federal and state estate taxes. Work with a Moss Adams advisor as well as your estate attorney to make sure your plan addresses your cash flow, business, and family needs as well as your charitable wishes. Confirm that your assets are properly titled and the beneficiary designations are correct. If you re one of the many business owners who will sell your business to a new owner in the next five to 10 years, make sure your estate plan is closely aligned with your business and personal goals. A smooth transition of MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 13

14 ownership interests will also help protect your wealth after the sale of your business. Gain an understanding of how the federal and state estate tax laws will affect you: As of 2014 every estate will have a federal exemption of $5.34 million per spouse and a top tax rate of 40 percent, including full step-up in basis for most estate assets. Portability, the ability to use a deceased spouse s unused estate federal tax exemption, remains a viable planning technique. purposes. On the other hand, contributions to nonqualifying charitable organizations are not deductible. Unreimbursed out-of-pocket expenditures incurred in rendering volunteer services may be deductible as direct payments to a charitable organization, so keep good records of these expenditures. If you use your vehicle for charitable purposes, you can deduct the mileage at $0.14 per mile or actual cost of gas and oil. You can deduct tolls and parking fees regardless of whether you use the standard mileage or actual expense methods. Appreciated or Depreciated Property Many states have their own estate tax, and in many cases the exemption amounts are lower than the federal amounts. Don t overlook gifting and estate planning opportunities as they relate to applicable state inheritance tax. Consider giving a charity appreciated capital gain property that you ve held for more than one year instead of cash. You ll get a deduction for the fair market value of the assets, and you ll avoid paying tax (including NIIT) on the capital gain Estate and Gift Tax Rates and Exemptions Gift tax rate 40% When investment assets that have declined in value will be used to make charitable contributions, the assets should be sold first, then the cash donated to charity. That way you ll get the benefit of the capital loss in addition to the charitable deduction. Estate tax rate 40% Timing of Larger Charitable Gifts Estate tax and lifetime gift exemption $5.34 million* Determine whether larger charitable contributions should be made in 2014 or 2015 for the greater benefit. GST tax exemption $5.34 million* You can make year-end charitable contributions using your credit card. The gift must be processed and charged Portability of estate tax exemptions between spouses? *Indexed for inflation Yes to your card by December 31 to be deductible on your 2014 tax return. Checks to charities must be written and postmarked by December 31 for a 2014 deduction. Charitable Giving A charitable contribution may entitle you to an income tax deduction in the year you make the gift. Most deductible contributions are those made to US organizations described in section 501(c)(3) of the Internal Revenue Code. This includes not-for-profit entities organized and operated for charitable, scientific, educational, religious, and other If you want to take a large charitable deduction but haven t decided on a charity (or charities) to receive your gift, consider making a charitable contribution by year-end to a donor-advised fund. This will allow you to receive the large charitable deduction in the current year, but you can still give the money to charities over time. If the charitable contribution is large enough, you may also want to consider establishing a private foundation. Discuss the costs and benefits with your Moss Adams advisor before doing so. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 14

15 Charitable Giving as Part of Your Overall Estate Plan Incorporate your charitable contribution planning into your long-term estate plan strategy, taking into account tax- and cash flow efficient ways to structure your gifts. Blend your lifetime charitable planning with your estate plan to help increase cash flow for yourself and your heirs. If you plan to make sizable donations, consider setting up a charitable remainder trust. You may take the deduction when you fund the trust, and the remaining assets will be passed to charitable organizations at the end of the trust term. Properly structured and administered, the trust can also accumulate greater assets without incurring a tax burden, since the trust is tax-exempt. Documenting Your Charitable Deductions If you donate: $249 or less $250 $500 $501 $5,000 More than $5,000 $500,000 or greater Retirement Planning Make sure to: Keep a receipt, letter, bank record, or other written record from the recipient with recipient s name, amount, and date of contribution. Obtain a written acknowledgment from the recipient. In addition to the written acknowledgment from the recipient, document the method of acquisition, date acquired, and adjusted basis of property. Obtain an appraisal by a qualified appraiser. Obtain an appraisal by a qualified appraiser and attach a copy to your tax return along with acknowledgment from recipient. Taxes can be a key factor in retirement planning. The taxrelated decisions you make now and throughout the course of your career can affect both the way you save and how much you ll save for your retirement. Some of the decisions you make are onetime choices that can be costly to change later on, so it pays to plan in advance. Certain plans, such as 401(k) and Keogh plans, allow larger tax deductions, but they must be established by year-end even though contributions don t need to be made by that time. If you re considering options for a company retirement plan, be sure to have it in place prior to year-end. Roth IRA Conversions Any taxpayer can now convert a traditional IRA to a Roth IRA regardless of his or her income. Certain qualified plans may allow for an inside the plan conversion. These should also be considered where appropriate. New IRA Rollover Rules Effective 2015 If you want to roll over multiple IRAs, you can still take advantage of this option for the remainder of However, effective January 1, 2015, the once-a-year limit on IRA rollovers that are not direct custodianto-custodian transfers will apply to all your IRAs in aggregate, not each to each one separately. Consult with your Moss Adams advisor to make sure any rollovers comply with the new aggregate rules and do not generate an unnecessary tax liability, interest, or penalties. IRAs Not Protected in Bankruptcy IRAs no longer have the same level of bankruptcy protection as some other retirement assets, according to a recent US Supreme Court decision. If you are concerned about keeping your long-saved money away from potential future creditors such as those of a spouse, children, or other beneficiaries after you re gone, consult with your Moss Adams advisor and your lawyer. Child s Earned Income If a child has earned income, there are strategies he or she can use to contribute to a traditional or Roth IRA. Where practical, consider employing children in the business to generate earned income. Those earnings can be contributed or funds could be gifted into the IRA accounts. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 15

16 2014 Requirements and Limitations: Retirement Savings Vehicles* INDIVIDUAL REQUIREMENTS Roth IRA Traditional IRA SEP IRA Simple IRA Qualified Plans: 401(k) or 403(b) Income Limitation Joint $181,000 $96,000 Single $114,000 $60,000 None None None Minimum Distribution Age None MAXIMUM CONTRIBUTIONS Employee $5,500 $5,500 Not permitted for plans set up after 1997 $12,000 $17,500 Catch-up (Age 50+) $1,000 $1,000 NA NA $5,500 Combined Employee and Employer NA NA $51,000 $51,000 $52,000 TAX BENEFIT Distributions are tax-free after age 59.5 Contributions are deductible Contributions may be made only by the employer; contributions not included in employee income Contributions are made pretax Contributions are pretax unless you re making Roth contributions *Distributions before age 59.5 are included in income and subject to an additional 10 percent tax, with some exceptions; all allow for tax-free growth. **Limits the deductibility of contributions; applies only to active participants in an employee-sponsored plan. Wealth Management While tax planning should not be the sole driver of investment decisions, it can play an important role in preserving and generating investment returns, growing your assets, creating sustainable income, and achieving financial security. The decisions you make today and throughout the course of your career can affect your shortand long-term investments as well as your taxes. Seek advice from both a tax and investment perspective so you can rest assured, knowing the two are aligned with your wealth management goals. Investment Management When selecting municipal bonds for the federal tax-free interest income, consider the impact of state income taxes as well. Work with your investment advisor to manage net capital gains and take advantage of any unrealized capital losses that may be in your account (tax-loss harvesting). Investment Strategy Given recent equity market performance, review your investment strategy to determine whether your asset MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 16

17 allocations remain consistent with your personal goals and if it s time to rebalance your portfolio. Reevaluate tax-exempt yields versus taxable yields in light of current market conditions and the 3.8 percent NIIT. Personal Financial Planning For those without a clear set of short- and long-term personal financial goals, take the time to create a personal financial plan and begin to monitor your progress toward those goals. Update an existing plan to ensure you remain on track. The strong market performance and economic recovery of the past few years is a good reason to update your existing personal financial plan and mark your progress. Consult your investment advisor to determine whether longevity annuities inside qualified plans are appropriate and make economic sense for your situation. Insurance Update your life insurance policies to ensure they re still in accordance with your current needs, transfer goals, and liquidity concerns. Pay particular attention to policy type, coverage amounts, ownership, and beneficiary designations. Review your existing insurance policies, including annuities, to confirm they re performing as expected and operating efficiently. If you purchased a new employer-owned life insurance policy, confirm that the required formalities are being followed. If not, it could trigger the proceeds to become taxable income when you receive them, increasing your corresponding tax liability. Discuss your income tax exposure with your Moss Adams advisor to determine if the use of life insurance and annuities are appropriate. These taxdeferred assets could provide a tax-efficient source of income. International Considerations These days, more individuals than ever need to be aware of cross-border factors that can impact their taxes. For example, US taxpayers living outside the United States need to be alert to special issues in their estate planning, while US taxpayers with noncitizen spouses have special issues of their own to address. Unique tax considerations also arise when individuals immigrate to or expatriate from the United States. In addition, while many cross-border investments and transactions might appear standard, they can involve unforeseen complexities in tax reporting. Consult with your Moss Adams advisor if you own any foreign mutual funds. Virtually all foreign mutual funds are considered to be passive foreign investment companies for US tax purposes. Beginning in 2013 any US person who owns a foreign mutual fund is required to file Form 8621 annually to report information regarding the mutual fund. With careful planning, you may also be able to reduce the US taxation of your foreign mutual funds. The IRS has made several changes to the Offshore Voluntary Disclosure Program, the Streamlined Foreign Offshore Procedures, and the Streamlined Domestic Offshore Procedures. These programs are designed for US taxpayers who have unreported foreign income or have not submitted all required disclosure forms to the IRS. A careful review of each program and individual s specific circumstances should be conducted before entering one of the three programs. US citizens living abroad are required to file US income tax returns annually. Often individuals living in countries with a high tax rate owe no US tax even though they re required to file a US tax return since they re able to claim a foreign tax credit based on the tax they pay to their country of residence. However, the foreign tax credit does not offset the NIIT (see page 11). US citizens living abroad should consider their investment alternatives and seek US tax planning advice in order to reduce the effects of the NIIT. MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 17

18 Health Care Reform for Individuals In addition to the NIIT and the additional Medicare tax discussed earlier in this guide, there are a number of Affordable Care Act provisions that individuals and families (if not covered by an employer s plan) may want to take into consideration with respect to tax planning. Substantiating Health Coverage in 2014 One of the Affordable Care Act provisions that has been delayed is the requirement that employers, insurers, and other third parties report that they offered or provided minimum essential coverage to individuals. This raises a critical question for 2014: Upon IRS examination, what types of documentation might you as an individual be required to provide to prove that you and your dependents had minimum essential coverage for all 12 months of 2014? We recommend you gather information regarding your health insurance coverage, such as the terms of your policy, whom it covers, and the period of time that it has covered and will cover you in Beginning with the 2015 calendar year, insurance companies will be required to report the coverage provided to a policy holder on the new Form B. Employers will report that they offered minimum essential coverage to their employees on Form 1095-C. Forms for the 2015 tax year will be received by the insurance holders by January 31, 2016, and can then be used to report minimum essential coverage on 2015 individual income tax returns. January 1, 2015, as long you complete your enrollment by December 15, Individual Shared Responsibility Provision All US citizens and legal residents are required to have qualifying minimum essential health coverage starting January 1, You and your family must have health care coverage, have an exemption from coverage, or make a penalty payment when you file your 2014 tax return in If you decide to forgo coverage, the 2014 penalty for not obtaining qualifying health coverage is the greater of $95 or 1 percent of household income. In 2015 the penalty increases to the greater of $325 or 2 percent of household income. In 2016 the penalty increases to the greater of $695 or 2.5 percent of household income. The penalty will be indexed for inflation after The maximum penalty for a family is three times the penalty of an adult individual. The penalty for dependents under age 18 is half the penalty of an adult individual. There are some exemptions from the individual shared responsibility provision, including certain situations where coverage is unaffordable or you are without coverage for a short period of time. Ask your Moss Adams advisor for more information on whether the exemption may apply to your particular situation. State Health Insurance Marketplaces Open enrollment for obtaining coverage in 2014 ended March 31, However, in some limited cases you may be able to purchase a private health plan outside the marketplace and outside the open enrollment period. Renew or purchase your 2015 coverage. Marketplace coverage for 2014 ends on December 31, You can either renew your existing health plan or choose a new plan via the marketplace during the 2015 open enrollment period, November 15, 2014, through February 15, Coverage can start as soon as MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 18

19 TAX PLANNING FOR BUSINESS OWNERS AND BUSINESSES Tax planning for business owners often requires consideration of the tax consequences to the owner as an individual taxpayer and vice versa, so be sure to review the previous section on tax planning for individuals (see page 7) Health Care Reform for Employers Reporting Requirements Employer Shared Responsibility Provisions: Transition Relief Foreign Account Tax Compliance Act Tangible Property Regulations Depreciable Real Estate and Business Equipment Cost Segregation Section 179 Depreciation Deduction, Bonus Depreciation, and Qualifying Purchases Bonus Depreciation for Qualifying Purchases Qualified Leasehold Improvements State Conformity with Section 179 and Bonus Depreciation Business Credits Credit for Small Employers Employee Health Insurance Expenses Employer-Provided Child Care Credit Research and Development Credit Employee Benefits Roth 401(K) Conversions Gay and Lesbian Married Couples Flow-Through Entity Structure: Business Owner Considerations Entity Basis Buy-Sell Agreements Ownership Transition C to S Corporation Election Qualified Dividends Exit Planning Sales and Acquisitions MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 19

20 Health Care Reform for Employers The health care reform legislation enacted in 2010 continues to evolve: While some rules and requirements have been delayed, others are coming into effect and keeping employers on their toes. Reporting Requirements Employer reporting requirements are effective for calendar year 2015 (and optional for 2014). taking steps toward offering it during the 2015 plan year. Employers who do take steps toward dependent coverage will not be penalized under the employer shared responsibility provision solely on account of a failure to offer this coverage. For 2015 (and any months in 2016 covered by a noncalendar-year-end 2015 plan years) coverage must be offered to at least 70 percent of qualifying employees. Beginning in 2016, that percentage increases to 95 percent. An annual return must be filed reporting whether you offered health insurance to your employee and, if so, what was offered. If you provide self-insured coverage, you must file an annual return reporting certain information for each employee covered. Employer Shared Responsibility Provisions: Transition Relief The employer shared responsibility provisions apply to applicable large employers (ALEs) those that employ 50 or more full-time-equivalent (FTE) employees and don t offer insurance that meets certain minimum requirements. The provisions were originally scheduled to take effect in 2014, but implementation was delayed until 2015 for employers with 100 or more FTEs and until 2016 for employers with 50 to 99 FTEs. ALE status for 2015 is determined based on the number of FTEs employed during any consecutive sixmonth period during Determine the date your organization must comply with the regulations. The provisions are generally effective on January 1, However, employers with at least 100 FTEs that maintained non-calendar-year health plans as of December 27, 2012, must comply with the provisions beginning with the first day of the 2015 plan year. Employers with FTEs must comply beginning with the first day of the 2016 plan year. Employer-provided health insurance plans must offer dependent coverage as well as employee coverage. If you do not currently offer dependent coverage, consider Foreign Account Tax Compliance Act In 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA) in an effort to identify US taxpayers with foreign accounts and assets shielded by the secrecy laws of foreign banks. While FATCA largely impacts foreign financial institutions, it also applies to certain nonfinancial US companies. A number of FATCA rules have already taken effect. The most recent effective July 1, 2014 requires US withholding agents to withhold 30 percent of certain US-sourced payments to noncompliant foreign financial institutions (FFIs) or noncompliant nonfinancial foreign entities (NFFEs). Planning tips: US companies have new vendor documentation standards for backup withholding and all payments to non-us persons. In addition to the new documentation standards, US withholding agents may have new FATCA reporting and withholding obligations. We recommend you conduct a comprehensive review of your vendor files, require foreign vendors and account holders to provide the applicable new versions of Form W-8, and develop an approach to implement the FATCA rules. In certain situations, an individual taxpayer is considered to be a US withholding agent if the person makes withholdable payments in the course of his or her trade or business. Employment income, self-employment MOSS ADAMS 2014 Year-End Tax Planning Guide CONTENTS 20