2014 Year-End Tax Planning Client Letter

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1 2014 Year-End Tax Planning Client Letter Year-end tax planning is especially challenging this year because Congress has yet to act on several tax breaks that expired at the end of Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these breaks until the very end of this year (and, possibly, not until next year). The breaks in limbo include: For individuals: o The option to deduct state and local sales and use taxes instead of state and local income taxes; o The above-the-line-deduction for qualified higher education expenses; o Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; o The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses: o 50% bonus first year depreciation for most new machinery and software; o The $500,000 annual expensing limitation; o the research tax credit; o The 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare surtax that applies to individuals receiving wages in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). We have compiled a list of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a plan for your situation. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make Tax Rates for Filing Status Rate Single Married Filing Joint 10% $0 to $9,075 $0 to $18,150 15% $9,075 to $36,900 $18,150 to $73,800 25% $36,900 to $89,350 $73,800 to $148,850 28% $89,350 to $186,350 $148,850 to $226,850 33% $186,350 to $405,100 $226,850 to $405,100 35% $405,100 to $406,750 $405,100 to $457,600

2 39.6% Over $406,750 Over $457,600 Year-End Tax Planning Moves for Individuals You may be able to reduce your taxes by contributing to a retirement plan. If your employer sponsors a retirement plan, such as a 401(k), 403(b) or SIMPLE plan, your contributions avoid current taxation, as will any investment earnings until you begin receiving distributions from the plan Retirement Plan Contribution Limits Type Of Plan Under Age 50 Age 50 and Over IRA/Traditional and Roth $5,500 $6, (k)/403(b) $17,500 $23,000 Simple IRA $12,000 $14,500 Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later. Alternatively you can sell your original holding and buy back something similar (but not identical). It may be advisable for us to meet to discuss year-end trades. Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those who anticipate being in a lower tax bracket next year. Note, however, it may pay to actually accelerate income into For example, this may be the case where a person s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit. Consider converting a traditional IRA into a Roth IRA if eligible to do so. Keep in mind that such a conversion will increase your adjusted gross income for If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion. It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.

3 Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don t pay your credit card bill until after year end. If you expect to owe state income taxes when you file your return next year, consider paying that state tax with an estimated payment or increased withholding prior to yearend to pull the deduction of those taxes into But beware that it could create an alternative minimum tax (AMT) problem. Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated. You may be able to save taxes this year and next by applying a bunching strategy to itemized deductions. Effectively, you bunch those deductions by trying to pay more every other year. Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015-the amount required for 2014 plus the amount required for Think twice before delaying 2014 distributions to 2015-bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year. Increase the amount you set aside for next year in your employer s health flexible spending account (FSA) if you set aside too little for this year. If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year s worth of deductible HSA contributions for This is so even if you first became eligible on Dec. 1, Year-End Tax-Planning Moves for Businesses & Business Owners

4 The main tax issue to keep in mind if you re a business owner is that a number of tax provisions, such as 50 percent bonus depreciation, expired at the end of In addition, the Section 179 deduction has been limited significantly. Congress may pass legislation to renew or modify these tax breaks perhaps retroactively. Of course, you can t count on that, so if you have used these provisions to reduce your taxes in the past, it might be advisable to adjust your tax payments for 2014 Businesses should consider buying machinery and equipment before year end and, under the generally applicable half-year convention, thereby secure a half-years worth of depreciation deductions for the first ownership year. Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), don t neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when total property placed in service in the tax year exceeds $200,000. A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income. If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 expense. To reduce 2014 taxable income, consider deferring a debt-cancellation event until To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses. If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year. Review estate and gift planning strategies For 2014, taxpayers are permitted to make annual tax-free gifts of up to $14,000 per recipient ($28,000 if married and using a gift-splitting election, or if each spouse uses separate funds). By making these gifts annually, taxpayers can transfer significant wealth out of their estate without using any of their lifetime exclusion. Consider making similar gifts early in Each

5 year brings a new annual exclusion, and a gift early in the year transfers next year s appreciation out of your estate. Additional gifts can be made using the lifetime gift exclusion, which is $5.34 million ($10.68 million for married couples) in Future exclusions are indexed for inflation. The recent increases to the exclusion make it a good time to review any existing estate and gift plans to ensure they best meet your needs. When combined with other estate and gift planning techniques, such as a GRAT (grantor retained annuity trust), the potential exists to avoid or reduce estate and gift taxes, while transferring significant wealth to other family members. Remember that the estate tax exclusion is portable, so if you and your spouse have combined estates that do not exceed $10.68 million, you can avoid the estate tax without needing to include language in your will creating, for example, a bypass trust. Conclusion As the 2014 tax season approaches, taxpayers have a lot of questions. Will expired tax provisions be reinstated? If so, will they apply retroactively to the beginning of the year? Will they be altered? Will new tax laws make it through the legislative process? And, most importantly, how will these decisions affect your taxes? These are legitimate concerns. Unfortunately, no one can predict the future. But we can offer you the reassurance that we will diligently watch the tax landscape for pending legislation that could have an impact you. Your safest course of action in the midst of uncertainty is to remain in close communication with your tax adviser for the latest guidance. We are happy to discuss with you any year end planning questions you may have. Please contact one of the four tax professionals at Williams & Parsons to discuss your particular situation. Welcome our newest CPA, Jacob Styer. Williams & Parsons PC, CPAs Certified Public Accountants 708 Superior Street Sandpoint, Idaho (208) (208) Fax Jacob Styer was born in Pennsylvania but moved to North Idaho in After a short period in Pocatello for college and CPA review classes he has been happy to call Sandpoint home since Jacob spent 10 years in the Coldwater Creek corporate tax department specializing in sales, use and property taxes. He is also active in the community as Treasurer for multiple non-profit organizations.

6 This letter was written in general terms for the widest possible use. This is intended as a guide only; the application of its concepts to certain specific situations will depend on the circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice before implementing any strategies. This letter should not be relied on as a substitute for that advice. If you have questions about how tax law or other financial matters may affect you, please call at Tax advice included in this communication was not intended or written to be used, and cannot be used by a taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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