1 Judy Shonborn, CPA, CFP (414) (414) (home & fax) W. Spring Green Road Greenfield, WI December 11, was a quiet year with regard to federal tax law. We are waiting for Congress to extend a few items that expired at the end of 2013 (including the tuition deduction, charitable donations directly from IRA accounts and the $250 educator expense deduction). One popular tax break, the credit for residential energy-efficient home improvement, expired as of the end of 2013 and it does not sound like Congress is likely to extend this credit for A big change affecting 2014 federal returns has to do with the Affordable Care Act: For individuals who do not have health insurance through an employer and did not purchase individual insurance, 2014 is the first year in which a penalty is assessed on the federal tax return. As part of the phase-in, the penalty is small in 2014 but it increases in future years. For individuals who purchased insurance through an exchange, if they qualify for a subsidy the amount is fine-tuned on the 2014 tax return. If the premium subsidy received through lower premiums was too high (because the tax return shows higher income than what was projected when the insurance was obtained), the difference is paid back on the tax return. If on the other hand the taxpayer is due a bigger subsidy (because the tax return shows lower income than what was projected when the insurance was obtained), an additional subsidy is given on the tax return. For Wisconsin taxes, the major changes affecting individuals are as follows: Several improvements were made to EdVest, Wisconsin s 529 education savings plan. The maximum deduction increased to $3,050 for More importantly, the deadline for contributions is no longer December 31 st. Starting for 2014, contributions can be deposited as late as April 15 th of the following year (like IRA contributions). The relationship test has been eliminated (i.e. deductions are no longer limited to parents, grandparents, aunts and uncles; anyone can contribute to an EdVest account and receive a deduction). If you contribute more than $3,050 per beneficiary, the excess is carried forward and is deductible in future years (e.g. a $5,000 contribution for 2014 results in a $3,050 deduction on the 2014 tax return and the remaining $1,950 is deductible in 2015). The state has a new form (Schedule CS) to report contributions and distributions. There is a new deduction for private school tuition (reported on a new Schedule PS). Starting for tax year 2014, a parent can deduct up to $4,000 paid per student for elementary school tuition and up to $10,000 paid per student for secondary school tuition. The child has to be a dependent on the parent s tax return. The school does not have to be a Wisconsin school. If the student was in 8 th grade in the spring of 2014 and 9 th grade in the fall of 2014, then the $10,000 secondary tuition amount applies to that student for Tuition includes mandatory book fees (i.e. fees for books paid directly to the school; it does not include books purchased at stores and online). Because of a Supreme Court ruling against the state of Wisconsin, the state now recognizes same sex marriages. For 2014, married couples must file a joint Wisconsin return (or married filing separately or, if qualified, as head of household). Note that the federal government started recognizing same sex marriages for taxes in 2013, but at that time Wisconsin required separate state tax returns (as single ). Same sex couples have the choice to amend their 2013 and prior Wisconsin returns from single, but only for years for which the statute of limitations for filing an amended return has not yet closed (Wisconsin allows returns to be amended for up to 4 years after the filing deadline, so the deadline for amending a 2010 Wisconsin return is April 15, 2015). The IRS continues to give warnings about scam phone calls. The IRS and state revenue departments communicate with taxpayers via mailed notices they do not call or taxpayers. These scam callers typically claim to be IRS agents and threaten lawsuits, arrest, deportation, loss of a driver s license, etc. Do not provide any information and hang up. But if you receive a mailed notice from the IRS or state, then send, fax or scan/ the notice to me and I will help you respond in a timely manner. 1
2 2014 & 2015 Tax Highlights Rates: Tax rates remain the same for 2015 except for increases in income levels for inflation. 10%* 15%* 25%** 28%** 33%** 35%** 39.6%*** 2014 Taxable Income: Single $0-$9,075 $9,076-$36,900 $36,901-$89,350 $89,351-$186,350 $186,351-$405,100 $405,101-$406,750 >$406,750 Head Hld. $0-$12,950 $12,951-$49,400 $49,401-$127,550 $127,551-$206,600 $206,601-$405,100 $405,101-$432,200 >$ Married $0-$18,150 $18,151-$73,800 $73,801-$148,850 $148,851-$226,850 $226,851-$405,100 $405,101-$457,600 >$457, Taxable Income: Single $0-$9,225 $9,226-$37,450 $37,451-$90,750 $90,751-$189,300 $189,301-$411,500 $411,501-$413,200 >$413,200 Head Hld. $0-$13,150 $13,151-$50,200 $50,201-$129,600 $129,601-$209,850 $209,851-$411,500 $411,501-$439,000 >$ Married $0-$18,450 $18,451-$74,900 $74,901-$151,200 $151,201-$230,450 $230,451-$411,500 $411,501-$464,850 >$464,850 * Except 0% rate on qualified dividends and long-term capital gains ** Except 15% rate on qualified dividends and long-term capital gains *** Except 20% rate on qualified dividends and long-term capital gains Personal Exemption: $3,950 subtraction from income for yourself and each dependent ($4,000 for 2015). For 2014, exemptions begin to phase-out once adjusted gross income exceeds $254,200 single, $279,650 head of household and $305,050 married. The phase-out is 2% for every $2,500 of income above these amounts. Note that if you are paying AMT, personal exemptions are not applicable. Standard or Itemized Deduction: You are allowed to subtract from taxable income the higher of your standard deduction or itemized deductions (primarily state income taxes, real estate taxes, mortgage interest and charitable donations). For 2014, itemized deductions are reduced by 3% of the amount your adjusted gross income exceeds $254,200 single, $279,650 head of household and $305,050 married, but never by more than 80% of your itemized deductions, and certain itemized deductions such as investment interest expense and casualty/theft losses are not reduced. The standard deduction amounts are: Married Head of Household Single Extra for Age 65+ and/or Blind Dependent 2014 $12,400 $9,100 $6,200 $1,200 married; $1,550 single $1, $12,600 $9,250 $6,300 $1,250 married; $1,550 single $1,050 Income Earned by Children: a) If the child is a dependent, the following applies: No tax on first $1,000 of investment income for 2014 (increased to $1,050 for 2015); tax at child s rate for the next $1,000 of investment income ($1,050 for 2015); tax at parent s tax rate for any additional investment income (see Kiddie Tax below) If the child has wages, for 2014 up to $6,200 of income may be tax-free (wages + up to $350 of investment income, not to exceed $6,200 total for 2014 and $6,300 for 2015) b) Kiddie Tax: The portion of investment income (interest, dividends, capital gains, rental income, IRA distributions, etc.) that exceeds $2,000 for 2014 ($2,100 for 2015) is taxed at the parent s marginal tax rate if one of the following applies: 1) Child is under age 18 2) Child is 18 at year-end (or and a full-time student) and didn t have earned income (wages) providing greater than 50% of their own support Caution a child who is not a dependent can still be subject to the Kiddie Tax. An example is a child who is 18 (or a year old student) who provides >50% of their own support from investment income (not wages). Child Tax Credit: The child tax credit remains $1,000 per qualifying child under age 17 for 2014 and The credit is gradually phased-out once income exceeds $110,000 ($75,000 if single or head of household) at a rate of $50 per $1,000 of extra income (e.g. for a married couple with two children, the $2,000 total credit is lost once income exceeds $150,000). Student Loan Interest: For 2014 and 2015, up to $2,500 interest is deductible but starts to phase-out once income exceeds $65,000 ($135,000 married). The interest deduction is completely eliminated once income exceeds $80,000 ($160,000 married). 2
3 Mileage Rates: Business Medical & Moving Charitable Social Security & Medicare Tax: Employees and employers each pay 6.2% Social Security tax and 1.45% Medicare tax. Plus as of 2013 there is a.9% additional Medicare tax on wages and selfemployment income in excess of $200,000 ($250,000 for joint returns). The rate for self-employed persons is just the combination of the employee and employer rates. Social Security taxes are paid on the first $117,000 of earnings in 2014 (increased to $118,500 for 2015). If you are already collecting Social Security, the federally taxable portion of your Social Security benefits depends on the level of your other income (up to 85% may be federally taxable). Wisconsin does not tax Social Security benefits. If you are collecting Social Security benefits and have not yet reached your full retirement age (FRA), in the years before you reach your FRA you can earn a small amount of wages or self-employment income (up to $15,480 for the year 2014; $15,720 for 2015) and still collect your full Social Security (above this level of earnings, SSA will reduce your benefits by $1 for every $2 by which you exceed the limit). In the year you reach your FRA, the income limit only applies for the months before your birthday, and the limit is much higher ($3,450 per month for 2014; $3,490 for 2015), and your benefit is only reduced by $1 for every $3 by which your earned income exceeds the monthly limit. Medicare Part B Premiums: There is no increase for 2015 in the monthly premiums for Medicare Part B. Monthly Premium Modified Adjusted Gross Income** Single* Married Filing Jointly Married Filing Separate $ $ $ 85,000 or less $170,000 or less $85,000 or less $ 85,001-$107,000 $170,001-$214,000 N/A $107,001-$160,000 $214,001-$320,000 N/A $160,001-$214,000 $320,001-$428,000 $85,001-$129, Above $214,000 Above $428,000 Above $129,000 * Also includes Head of Household, Qualified Widow/Widower with dependent child, and Married Filing Separate if you lived apart all year. ** The 2015 premium is based on your 2013 tax return. If your return was filed late, then a one year earlier tax return is used instead. Tax Planning Strategies and Reminders 1) Charitable Donations: Charitable contributions mailed or charged by December 31 st are deductible in To support the deduction if you are audited, you are required to obtain documentation prior to filing your tax return (a bank record or written communication from the charity showing the donation amount and date for all donations under $250; for donations to any charity of $250 or more on a single day, you must obtain a written communication from the charity). For donations done through payroll (like United Way), keep your year-end pay stub and the pledge card or document prepared by the charity. As always, the value of any goods or services received must be subtracted from the donation (e.g. Girl Scout cookies, item purchased at auction). Non-cash donations over $5,000 (except publicly traded stock) require a written appraisal. Car or boat donations over $500 are limited to the amount reported by the charity on Form 1098-C (a copy of this form must be filed with the tax return). 2) Child and Dependent Care Expenses: A dependent care plan at work allows up to $5,000 of expenses to be paid pre-tax. Qualifying expenses include daycare costs, in-home care, nursery or preschool costs, before or after-school care, and camps (including those specializing in a particular activity like sports camps, but not overnight camps). The cost of summer school or tutoring does not qualify. Qualifying dependents include children under age 13 (for care up to their 13 th birthday, although the actual payment can be after that date), as well as a disabled dependent or spouse. There is also a federal credit and a state deduction for expenses paid with after-tax dollars. 3) Pre-Tax Medical Savings Plans: If you participate in a medical savings plan at work where you use it or lose it, remember that some over-the-counter items can be reimbursed under these plans. If you have money left over at year-end, don t forfeit it. Ask your company for a list of items you can buy. 3
4 4) Health Savings Accounts (HSA): If you have a high deductible plan that is HSA eligible, you can contribute to an HSA. Contributions are limited to $3,300 for individuals and $6,550 for families (for 2015, $3,350 for individuals and $6,650 for families). Individuals age 55 or older can contribute an extra $1,000 (same for 2015). The deadline is April 15 th of the following year. Contributions stop at age 65 (the limit is prorated for that year), but withdrawals after age 65 continue tax-free. 5) Investment Income: a) Realized capital gains and losses are first netted. If the net result is a loss, you are allowed to deduct up to $3,000 ($500 for Wisconsin). Any excess loss is carried over to future years. b) Don t forget about wash sale rules. If you sell an investment at a loss, but buy the same exact investment within 30 days of sale (30 days before or after, including reinvested distributions), the loss is not allowed. Instead, the basis of the new shares is reduced by the amount of the loss. c) If your taxable income (income after deductions) is below the end of the 15% federal tax bracket ($36,900 single and $73,800 married), most likely it would make sense to increase your 2014 taxable income if you anticipate higher future income (to fill up the 15% federal tax bracket). One alternative would be to convert some or all of your Traditional IRA into a Roth IRA. Another option would be to sell some investments with realized gains. 6) Retirement Contributions: a) Contribution limits for IRAs and various plans are as follows: IRAs 401(k), 403(b), 457(b) Plans SIMPLE Plans < Age 50 Age 50+ < Age 50 Age 50+ < Age 50 Age ,500 6,500 17,500 23,000 12,000 14, ,500 6,500 18,000 24,000 12,500 15,500 b) The income limits for allowing IRA contributions are as follows: Joint Taxpayers Single/HOH Taxpayers Roth IRA for 2014 $181k - $191k phase-out $114k - $129k phase-out Roth IRA for 2015 $183k - $193k phase-out $116k - $131k phase-out Traditional IRA - deductible: No employer plan Always allowed Always allowed Covered by employer plan: For 2014 $96k - $116k phase-out $60k - $70k phase-out For 2015 $98k - $118k phase-out $61k - $71k phase-out Spouse has employer plan: For 2014 $181k - $191k phase-out NA For 2015 $183k - $193k phase-out NA Traditional IRA nondeductible Always allowed Always allowed c) Remember that IRA contributions are only allowed to the extent of earned income (wages, selfemployment income, etc.). It s fine if only one spouse earns the income - both individuals can contribute to an IRA to the extent of joint income. Children can contribute to IRAs if they have earnings (there is no minimum age). If you are age 70½ or older at year-end, you can contribute to a Roth IRA but not a Traditional IRA. You have until April 15 th of the next year to contribute. d) If you are self-employed, consider a SEP IRA, SIMPLE IRA or single-person 401(k). SEPs can be set up even after December 31 st (not SIMPLE and 401(k) plans). Funding can be as late as April 15 th (or later with an extension). Except for corporations, contributions are based on net business income, therefore your exact contribution limit is determined when I prepare your return. e) If your employer allows you to contribute to a Roth 401(k) account (versus pre-tax contributions), I recommend taking advantage of Roth accounts under two scenarios: 1) If you think you are likely to be in a higher tax bracket in the future or 2) if you already have significant pre-tax retirement savings and want to diversify from a tax perspective. f) Anyone can convert a Traditional IRA into a Roth IRA, regardless of their income. g) For defined contribution plans, the maximum contribution (employee + employer) is the lesser of 25% of compensation or $52,000 ($53,000 for 2015). Individuals 50 or older are allowed $5,500 more ($6,000 for 2015). Compensation is capped at $260,000 for 2014 ($265,000 for 2015). 4
5 7) Required Withdrawals from IRAs/Retirement Plans: For individuals who reach age 70½ during 2014, it is important to start withdrawing money from Traditional IRAs and retirement plans (to avoid a nasty 50% under-withdrawal penalty). You must withdraw your RMD by December 31 st each year, except in the year in which you first turn 70½, when the deadline is extended to April 1 st of the following year (but then you will receive two years of distributions in one tax year). There is an exception from the RMD requirement from a company plan if you are still employed at that company, but the exception does not apply if you own the company. Withdrawals are not required from Roth IRAs. 8) Education Savings: a) Section 529 plans (such as EdVest in Wisconsin) are a good way to save for college. Earnings are tax-free if the money is used for post High School education. There is no federal tax deduction for contributions, but contributors receive a Wisconsin tax deduction up to $3,050 per beneficiary, saving about $200 in state taxes for each $3,050 contribution. Note that contributions in excess of $3,050 per beneficiary are carried forward to future years (to be deducted on future state returns). Contributions can now be made as late as April 15 th of the next year. b) Another alternative is a Coverdell Education Savings Account (CESA). The annual contribution limit per child (regardless of how many people contribute) remains $2,000 for 2014 and 2015, but is limited if your joint income is over $190,000 ($95,000 for single taxpayers). However, other family members (including your child) can contribute to the CESA if the parent s income is too high. CESA contributions can be made as late as April 15 th of the next year. There is no tax deduction, but earnings are tax-free if the money is used to pay education costs (including K-12 tuition). c) Before depositing money into education accounts, be sure to first take full advantage of IRAs and retirement plans since this is better for taxes and financial aid. If you save enough for retirement, you will be in excellent financial shape and can help your child with college costs. You can use student loans to pay college costs, but there are no loans for retirement. Contribute to Roth IRAs if you are eligible. You can withdraw Roth contributions at any time, without tax or penalties, so Roth IRAs give you the flexibility to use savings for retirement, college costs and any other priorities. 9) Tuition: Review tuition paid this year and expected for next year (including tuition paid using loans). Consider whether to pay for the spring semester in December or January (the payment date is critical because a payment in December 2014 counts for 2014 deductions and credits, not 2015 when the student actually attends class). Shifting payments between years may allow you to take advantage of one of the available tax breaks for an extra year. a) Federal American Opportunities Credit: Up to $2,500 tax credit per student (100% of first $2,000 of tuition & books/supplies/equipment + 25% of next $2,000) Enrolled at least half-time; available for 4 years of undergraduate tuition (Freshman Senior) Credit phases-out for couples with income between $160k-$180k (for single filers $80k- $90k) Up to $1,000 is refundable (Note: a dependent child can t claim a refundable credit on their tax return) b) Federal Lifetime Learning Credit: Up to $2,000 tax credit per student (20% of first $10,000 of tuition and course materials) Available for both degree and non-degree programs; no limit on number of years claimed Credit phases-out for couples with 2014 income between $108k-$128k (for single filers $54k- $64k) c) Federal Tuition Deduction (expired at the end of 2013; Congress is expected to extend it): $4,000 tuition/books deduction if income is $130k or less ($65k or less for single filers) $2,000 tuition/books deduction if income is $130,001-$160,000 ($65,001-80,000 for single) Maximum deduction is the total that can be claimed on a return (not per student) Available for all undergraduate and graduate levels; no limit on number of years claimed Cannot deduct tuition if claimed one of the above credits for the same student d) Wisconsin Tuition Deduction: Deduction for in-state tuition ($6,940 for 2014; increases for inflation each year) Phases-out for couples with income $82,590-$103,240 (for single filers $51,620-$61,940) 5
6 10) Business Purchases: If you are planning to purchase business equipment soon, consider doing so by December 31 st to get a write-off ( Section 179 expense) against your 2014 income. Note that Section 179 doesn t apply to landlords, as property renting is not considered a business under tax law. You can expense up to $25,000 of capital items on your federal and state return for 2014 (versus depreciating the cost over the asset life). Note: Congress may still raise this limit for ) Business/Rental/Farm Expenses: Don t forget small out-of-pocket costs. If you own a corporation, partnership or LLC, reimburse yourself for business expenses paid personally. If you are a sole proprietor, comb through your records now to maximize your deductions. Remember that amounts charged to a credit card are considered paid (it s an expense in the year the item is charged to your credit card, not when you make a payment on the credit card). The key to being able to deduct an expense is that it is ordinary and necessary to your business or rental activity. Here is a reminder of expenses that may be overlooked: Office and computer supplies, miscellaneous software and postage Entertainment costs (for clients and employee gatherings) Gifts for business reasons (up to $25 to an individual) Business subscriptions, dues to professional groups and continuing education Promotional and advertising costs Travel expenses (keep a mileage log to deduct business use of your vehicle) Internet and cell phone costs, and long-distance charges to your home phone Interest on credit cards (prorated between personal and business if used for both) Legal and accounting fees 12) Business Form 1099-MISC: If your business paid more than $600 to a vendor for services (not products), you are required to send a 1099-MISC to the vendor by January 31 st, and by February 28 th to the IRS and the state. This does not apply if the vendor is a corporation (except 1099-MISC forms are required to be sent to attorneys and medical care providers even if they are incorporated). Business names that end in Inc., Corp. and S.C. are corporations. Examples of companies that are not corporations include LLC (Limited Liability Company), LP (Limited Partnership) and LLP (Limited Liability Partnership). Call me if you have any questions or would like me to prepare your 1099s. 13) Estate Planning & Gifts: Gifts up to $14,000 to an individual in 2014 (same for 2015) do not require reporting to the IRS; gifts over $14,000 are required to be reported on Form 709. Even if you are required to file Form 709, keep in mind that the giver pays no gift tax until lifetime gifts reported on Form 709 exceed the lifetime exclusion (currently $5,340,000; increased to $5,430,000 for 2015). Certain gifts are not reported on Form 709, such as gifts to spouses, or directly paying someone s medical or education expenses. At death, an estate tax is paid by individuals whose net assets exceed $5,340,000 (increased to $5,430,000 for 2015). Married individuals each have their own estate exemption, so married couples essentially avoid estate tax on twice the amount (i.e. up to $10,680,000 of net assets; increased to $10,860,000 for 2015). The maximum estate and gift tax is 40%. Please feel free to call or if you would like to discuss any of these items or other issues, especially before proceeding with a large transaction. Thank you for your business and I look forward to working with you next year! 6
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