TAX GUIDE 15. A Publication of RubinBrown LLP

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1 TAX GUIDE 15 A Publication of RubinBrown LLP

2 Welcome Today s tax environment is more dynamic than ever before. This year, we sought to find a way to keep our clients and friends as up-to-date as possible with the most comprehensive information. Because it is formatted in a convenient.pdf format, you are welcome to print it and utilize it as a resource for you and your business. The 2015 Tax Guide highlights strategies for families, executives, businesses, and retirees. Please remember, however, that this guide should not serve as a replacement for tax advice regarding your specific situation. Our tax partners and professionals are pleased to discuss any of the ideas outlined in this guide or any other tax planning options that may be available to you. We hope you find this tax guide helpful. Please note that several sections of this year s guide are subject to change based on expected tax legislation. We plan to update this guide and re-release when new legislation is passed. Your feedback is always appreciated. Please contact us and our tax professionals at our offices in Denver, Kansas City, and St. Louis. Pleasant reading! John F. Herber, Jr., CPA Managing Partner Steven J. Brown, CPA Partner & Chairman, Tax Services Group

3 Recent Federal Tax Legislation At the end of 2013, more than 60 tax provisions expired. Most of these provisions were extended for one year with the passage of the Tax Increase Prevention Act of 2014, in December 2014 and made retroactive to January 1, Because this legislation extended these provisions for only one year, most of them expired again on December 31, RubinBrown fully expects that many of these provisions will be extended again through legislation that will likely be enacted during 2015 and be retroactive to January 1, By Tim Sims, CPA Partner The extended provisions include incentives for individuals and businesses as well as energy tax incentives and pension plan provisions. Some of the key provisions extended for 2014 are as follows: Individual Provisions Extended Optional sales tax deduction (in lieu of state and local income taxes) Above-the-line higher education deduction Exclusion of income from mortgage debt cancellation Above-the-line classroom expense deduction Mortgage insurance premium deduction Tax-free charitable distributions from IRAs Business Provisions Extended 50% bonus depreciation Enhanced code section 179 expensing ($500,000 expense limit; $2,000,000 investment limit) Research & experimentation tax credit Work Opportunity Tax Credit New Markets Tax Credit 100% exclusion for gain on qualified small business stock Reduced recognition period for S corporation built-in gains tax RubinBrown fully expects the discussion on tax extenders will resume again in The current administration and Congress has indicated they may address overall tax reform in However, with the presidential election coming up in 2016, we may only see another tax extender bill. We will update the 2015 Tax Guide once new legislation is enacted. In the meantime, it is important to note that information throughout this guide will, in all likelihood, be revised.

4 Tangible Property Regulations The IRS issued final tangible property regulations effective for tax years beginning on or after January 1, 2014 that provide guidance regarding when a taxpayer must capitalize costs incurred in acquiring, maintaining or improving tangible property and when these costs should be expensed. These regulations provide taxpayers with numerous potential accelerated tax deduction opportunities based on their specific facts and circumstances. By Henry Rzonca, CPA Partner The key provisions of the regulations include: Definition of Unit of Property (UOP) Standards used to determine if the UOP has been improved, requiring the capitalization of costs Definition of materials and supplies and guidance on deduction timing, including rotable spare parts De minimis safe harbor rule and election for deducting cost otherwise capitalized Routine maintenance safe harbor rules Qualifying small taxpayer election for building repairs Partial dispositions deductions of building components and removal costs The following is a brief summary of each of these key provisions. Unit of Property (UOP) The expenditure relative to the UOP is used to determine if the costs are capitalized or expensed, making it important to determine the applicable UOP. In general, the larger the UOP, the more likely the costs will not be an improvement requiring capitalization. For personal property and real property other than buildings, all components that are functionally interdependent are considered a single UOP. Special rules apply to buildings, plant property, leased property and network assets. Buildings the building and its structural components are one UOP. The building structure consists of the building and its structural components other than designated building systems. The structural components that are designated as building systems are HVAC, plumbing, electrical, escalators, elevators, fire protection and alarm systems, security systems and gas distribution systems. The improvement rules are applied separately to the building structure and to each building system. Plant property - each component that performs a discrete and major function in an industrial process is a UOP.

5 Leased property (other than buildings) determined under the general rules for property other than buildings. The UOP may not be larger than the property subject to lease. Network assets the UOP is determined by the facts and circumstances or as provided in published guidance. Improvement Standards The regulations contain guidance for determining if costs result in an improvement of tangible property that must be capitalized. Generally a UOP has been improved and capitalization is required if the expenditure results in a: Betterment to the UOP o Ameliorates a material condition or defect that either existed prior to the taxpayer s acquisition of the UOP or arose during the production of the UOP, whether or not known at the time of acquisition or production, o Is for a material addition, including physical enlargement, expansion, extension, or addition of a major component to the UOP or a material increase in the capacity, including additional cubic or linear space, of the UOP, or o Is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of the UOP. Restoration of the UOP o o o o o o Is for the replacement of a component of a UOP for which the taxpayer has properly deducted a loss for that component, other than a casualty loss under section , Is for the replacement of a component of a UOP for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component, Is for the restoration of damage to a UOP for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, or relating to a casualty event described in section 165, Returns the UOP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use, Results in the rebuilding of the UOP to a like-new condition after the end of its alternative depreciation system class life, or Is for the replacement of a part or combination of parts that comprise a major component or substantial structural part of a UOP. Adaptation of the UOP o An amount is to adapt a UOP to a new or different use if the adaptation is not consistent with the taxpayer s ordinary use of the UOP at the time originally placed in service by the taxpayer. The regulations provide numerous examples relating to betterments, restorations and adaptations, however, no safe harbor rules are provided. The law is complex and whether or not costs result in capitalized improvements must be evaluated under the

6 specific facts and circumstances. Materials and Supplies The regulations define materials and supplies as tangible property used or consumed in the taxpayer s operation that is not inventory and that is: A unit of property (UOP) of $200 or less, A UOP used or consumed in 12 months or less, A component used to maintain, repair or improve a UOP and not acquired as a part of any single UOP, Fuels, lubricants, water and similar items expected to be consumed in 12 months or less, or Property identified as materials and supplies by IRS guidance. The timing of the deduction of materials and supplies differs according to the type of material and supply: Incidental materials and supplies, those for which no record of consumption is kept or physical inventory is taken, are deducted when purchased. Non-incidental material and supplies, those for which a record of consumption is kept or physical inventory is taken, are deducted when used or consumed. Rotable spare parts, temporary spare parts and standby emergency spare parts are deducted when used or consumed, which is defined as in the year in which it is disposed. A taxpayer may also elect an optional method of accounting for rotable spare parts and temporary spare parts. A taxpayer may elect to capitalize and depreciate only rotable, temporary or standby emergency spare parts, but must do so for all such parts if the election is made. De Minimis Rule The regulations provide a safe harbor de minimis expensing election for amounts paid to acquire or produce a unit of property. A taxpayer with an applicable financial statement (generally an audited financial statement) may expense property up to $5,000 per-item, per-invoice as substantiated on the invoice. Taxpayers that do not have an applicable financial statement may expense property up to $500 per-item, per-invoice as substantiated on the invoice. The de minimis safe harbor will apply only if: The taxpayer has a written policy in place at the beginning of the tax year to expense the amount for book purposes, The amount is expensed for book and tax purposes pursuant to the policy, and An annual election is made by the taxpayer by attaching a statement to the timely filed original Federal tax return. Other items to note: Electing the de minimis safe harbor is not a change in accounting method and does not require filing Form 3115.

7 The regulations provide that additional costs of acquiring property (e.g., freight, installation) must be included in determining the total cost of the property if the additional costs are included on the same invoice as the tangible property acquired. Routine Maintenance Safe Harbor The safe harbor applies to amounts paid for recurring activities that a taxpayer expects to perform as a result of the taxpayer s use of the unit of property to keep it in its ordinarily efficient operating condition. The activities are routine only if the taxpayer reasonably expects to perform the activities more than once during the 1) 10 year period beginning at the time a building structure or the building system is placed in service, or 2) personal property s alternative depreciation system class life beginning at the time the property is placed in service. Qualifying Small Taxpayer Election Qualifying small taxpayers (those with $10 million or less average annual gross receipts in the three proceeding tax years) may elect to not apply the improvement standards to eligible building property. To be eligible for the election the total amount paid during the tax year for repairs, maintenance, improvements and similar activities performed on an eligible building cannot exceed the lesser of $10,000 or 2% of the unadjusted basis of the building. Eligible building property includes a building unit of property that is owned or leased by the qualifying taxpayer, provided the unadjusted basis of the building unit of property is $1 million or less. Partial Disposition Election If costs are required to be capitalized due to meeting one of the improvement standards, the net tax value of the improved (original) property may be written off, including removal costs. If the net tax value of the improved property is not readily available, any reasonable and consistent method may be used to determine the net tax value. The taxpayer may continue to depreciate the improved assets rather than perform the tasks necessary to write off the net tax value. Next Steps - Actions to Take To be in the best position to comply with these regulations and to take advantage of the accelerated tax deduction opportunities that they provide, taxpayers should consider the following actions: Establish or modify a written capitalization policy. Unless the policy is written, is in place at the beginning of the tax year for which it applies, and is followed for

8 financial reporting (book) and tax purposes, the taxpayer may not rely on the de minimis safe harbor rule. Review depreciation records to identify previously capitalized costs that under the regulations should have been expensed. Accelerated deduction opportunities exist in 2014 only to write off the net tax value of such costs. Particular attention should be paid to items such as building refreshes, building remodels, tenant improvements, roof repairs, building system (HVAC, electrical, etc.) repairs, window replacements, floor replacements and parking lot resurfacing. Identify property that has been depreciated under an incorrect life and/or method and file for a change in method of accounting to correct the error. There is concern that the IRS may increase its attention in identifying such errors which could result in a permanent loss of deduction. Prepare the appropriate change in accounting method filings. Compliance with the regulations may require taxable income impact computations (section 481(a) adjustment) and will require the filing of one or more Application for Change in Accounting Method forms (Form 3115). Break out in the depreciation records previously placed in service and future additions of personal property, building systems, and parts of the building structure that are likely to be improved prior to the end of the asset s depreciable life. This will provide for a shorter depreciable life and assist in the opportunity to write-off the remaining net tax value of later improved assets.

9 Family Tax Planning Strategies There are many tax strategies that individuals or families may want to consider to minimize their tax burden. 1. General A good way to begin planning for your taxes is to estimate your adjusted gross income (AGI), taxable income and tax bracket. Knowing your AGI, taxable income and tax bracket can help you project the tax effect of various planning strategies. By Scott Quinn, CPA Partner a. What is AGI? AGI is an intermediate figure between gross income and taxable income. AGI is the starting point for computing deductions, tax credits and other tax benefits that are based on or limited by income. Technically, AGI means a person s gross income minus certain deductions that often are referred to as above-the-line deductions. Above-the-line deductions include: Expenses incurred on account of a trade or business by the taxpayer (except expenses incurred as an employee) Losses allowed from the sale or exchange of property Expenses attributable to rental or royalty property Contributions by self-employed persons to pension plans Contributions to IRAs Alimony payments Certain moving expenses Interest on student loans Certain post-secondary tuition and related expenses Contributions to a health savings account b. What is Taxable Income? Taxable income is the income on which an individual s income tax is directly based. Technically, taxable income is an individual s AGI minus that individual s itemized deductions or standard deduction and any available exemptions for the taxpayer, his or her spouse, and dependents. 2. Accelerating Deductions and Deferring Income Virtually any taxpayer can benefit from strategies that accelerate deductions or defer income based on the premise that it generally is better to pay taxes later rather than sooner. For example, a taxpayer may be able to postpone an IRA withdrawal or prepay a January mortgage payment in December.

10 However, always be aware of the side effects of any action that moves AGI from one year to the next. If your AGI is reduced in 2015, it generally means your AGI will be higher in Among other things, higher AGI can increase the taxable amount of social security benefits, reduce or eliminate the ability to make deductible IRA contributions, trim your write-offs for medical expenses and miscellaneous itemized deductions, and reduce tax credits for dependent children. A higher AGI can phase out your exemptions and total itemized deductions, and increase your net investment income surtax. That is why it is important to monitor your AGI and keep the big tax picture in mind. In other words, don t just think about the current tax year; also consider how your actions may affect your next year s taxes. 3. Managing Your Adjusted Gross Income Many tax breaks are only available to taxpayers with AGI below certain levels. In addition to some education incentives (discussed below), other common AGIbased tax breaks include: Nondeductible Roth IRA contribution of up to $5,500 or $6,500 if the taxpayer is age 50 or older (with a phase-out ranges beginning at $181,000 and $183,000 for joint filers and $114,000 and $116,000 for single filers, for calendar years 2014 and 2015 respectively) Child tax credit (phase-out begins at $110,000 for married couples and $75,000 for singles) $25,000 rental real estate passive loss allowance (phase-out range of $100,000-$150,000 for joint and single filers) Exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers) Accordingly, strategies that lower your adjusted gross income or increase certain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits. 4. Shifting Income to Children The strategy of putting investment property in your children s names to take advantage of their lower tax rates is harder to take advantage now than in prior years because the kiddie tax rules have been expanded to include children over age 18 but under age 24 who are full-time students. With this increased age limit, more families will be affected by the kiddie tax rules. Under current law, children under 18, and full-time students under age 24, may now have their unearned investment income, in excess of a certain amount, taxed at their parents marginal tax rate. For 2014, to the extent the kiddie tax rules apply, a child will have his or her unearned income (dividends, interest, gains from the sale or exchange of property) taxed in three steps:

11 Unearned income up to $1,000 is not taxed. Unearned income between $1,001 and $2,000 is taxed at the child s rate. Unearned income of more than $2,000 is taxed at the parents rate (if higher). Shifting assets to a child under 18 (or age 24, if applicable) can still result in tax savings even if the kiddie tax rules apply for unearned income that does not exceed $2,000. For example, a transfer of assets to a child that produces $2,000 in 2014 income to the child could save a 39.6% bracket family $692 (39.6% of $2,000 minus 10% of $1,000). 5. Employing Children or Grandchildren Employing your children (or grandchildren) shifts income from you to them. This strategy typically subjects the income to the child s lower tax bracket and may actually avoid tax entirely due to the child s standard deduction. There also are payroll tax savings, since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA so they can start building a retirement nest egg early. When employing your child or grandchild, keep in mind that the wages paid must be reasonable given the child s age and work skills. Also, if the child is in college or entering college soon, excessive earned income may have a detrimental impact on the student s eligibility for financial aid. 6. Protecting Dependency Exemptions If you expect to claim a dependency exemption for someone other than your child who is under age 19 or who is a student under age 24, you will lose the exemption if that person has gross income in excess of $3,950. In this case, you should consider deferring the dependent s excess income for the rest of the year if the tax savings exceeds the deferred income produced by the exemption. 7. Child Tax Credit Taxpayers who have qualifying children under the age of 17 are entitled to a $1,000 per child tax credit. The credit begins to phase out when modified AGI reaches $110,000 for joint filers, $55,000 for married taxpayers filing separately, and $75,000 for singles. The credit is reduced by $50 for each $1,000 of modified AGI above the thresholds. 8. Education Incentives There are many tax incentives for education-related expenses. If you or members of your family are or will be incurring these types of expenses, it is worth examining them a bit more closely. Some strategies to consider include:

12 a. General The Tuition and Fees deduction which reduces taxable income was extended only through The American Opportunity Credit and Lifetime Learning Credit, however, provide a tax credit based on a percentage of your qualified college expenses. The American Opportunity Credit provides a partially refundable credit. Generally, taking a tax credit will provide a greater benefit than a deduction because a credit reduces taxes and a deduction reduces income. b. American Opportunity Credit The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. 40% of the credit (up to $1,000 maximum) is refundable. The tax credit is scheduled to have a limited life span, meaning it will be available only through 2017, unless future legislation extends the credit. c. Lifetime Learning Credit The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the American Opportunity Credit, you need not be enrolled at least half-time. Even if you took only one class, you may take advantage of the Lifetime Learning Credit. d. Eligible Education Institutions All accredited colleges and universities are eligible educational institutions. Additionally, vocational schools and other postsecondary institutions are eligible. Basically, if the institution is eligible to participate in federal student aid programs through the U.S. Department of Education, then you may use tuition and fees paid to the school for claiming the Hope or Lifetime Learning Credits. e. Qualifying Expenses Qualifying expenses include amounts paid for tuition and any required fees (such as registration and student body fees), books, supplies and equipment. The Lifetime Learning Credit is more restrictive in that the books, supplies and equipment must be required to be purchased from the institution. Qualified expenses do not include room and board, insurance, student health fees, transportation or living expenses. You must be responsible for paying the college tuition and fees. You must reduce your qualifying expenses when figuring your tax credit by the amount of financial assistance received from grants, scholarships or reimbursements from your employer. You do not need to reduce your

13 qualifying expenses, however, if you paid for college tuition using borrowed funds, including student loans, or by using gifts from family members. f. Who Can Claim the Education Credits? If your son or daughter is going to college and you claim him or her as a dependent, then only you can claim the education credits. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return. If you pay the college expenses for someone who is not your dependent, you cannot claim any education credits. g. Income Limitations on Education Tax Benefits The amount of the American Opportunity Credit or Lifetime Learning Credit is phased out based on Adjusted Gross Income. The phaseout begins at the following AGI limits for 2014: American Opportunity Lifetime Learning Credit Credit Single, Head of Household, $80,000 $54,000 or Qualifying Widow(er) Married Filing Jointly $160,000 $108,000 Compare these limits with the income limitations on the tuition and fees tax deduction. The full $4,000 deduction is allowed if you earn up to $65,000 (single, head of household, qualifying widow) or up to $130,000 (married filing jointly). The deduction is reduced to $2,000 if your income is between $65,000 and $80,000 (unmarried taxpayers) or is between $130,000 and $160,000 (married filing jointly). No education tax break of any type is allowed for taxpayers who are married but filing separately. Separate filers are not eligible for the American Opportunity Credit, Lifetime Learning Credit or the tuition and fees deduction. h. Tax-Advantaged Education Saving Opportunities Coverdell Education Savings Accounts (formerly Education IRAs) You may set up an education account to save for the qualified higher education expenses of a designated beneficiary. Distributions from the account are tax-free to the beneficiary, provided they do not exceed the beneficiary s qualified education expenses for the year. The maximum amount you can contribute to the account is $2,000 per year. Contributions must end when the beneficiary reaches age 18. Your contribution for 2014 must be made by your return due date, not including extensions. Therefore, you have until April 15, 2015, to make a 2014 contribution.

14 Coverdell accounts may be used to fund higher education expenses as well as fund elementary and secondary education expenses (kindergarten through grade 12), whether incurred in a public, private or religious school. Qualified education expenses include tuition, fees, books, supplies, equipment, and room and board. The amount that can be contributed to a Coverdell account is limited for higher-income taxpayers. The contribution is phased out for joint filers with AGI between $190,000 and $220,000 and for single filers with AGI between $95,000 and $110,000. Qualified Tuition Programs If you are going to pay some or all of your child s college expenses, you should consider a qualified tuition program. This type of program, known as a 529 plan, allows a person to make cash contributions to an account on behalf of a beneficiary for payment of qualified higher education expenses. The account usually allows you to select from a number of investment options. Contributions often are deductible on your state tax return. For example, contributions to any 529 plan are deductible on your Missouri tax return up to $8,000 per taxpayer. A husband and wife can contribute and deduct up to $16,000 to a 529 plan. Distributions from a qualified tuition program that are used to pay qualified higher education expenses are tax-free. Qualified educational expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution, as well as the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. i. IRA Education Expense Withdrawals The 10% penalty tax on early withdrawals from a regular or Roth IRA does not apply to distributions from an IRA if the amounts are used to pay qualified higher education expenses for yourself, your spouse, your child or grandchild. Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at a post-secondary institution.

15 j. Education Loan Interest Deduction If you need to borrow money in order to pay for school expenses, a deduction for the loan interest will lessen the burden. A deduction for up to $2,500 is allowed annually for interest paid on qualified education loans. You can claim the deduction on your return, even if you do not itemize your deductions. A qualified education loan is any debt you incur to pay qualified higher education expenses for yourself, your spouse or a person claimed as a dependent at the time that the debt was incurred. The deduction is phased out for taxpayers with modified adjusted gross income between $65,000 and $80,000 ($130,000 and $160,000 for married taxpayers filing joint returns). 9. Charitable Contributions Charitable contributions should be timed so as to obtain the maximum tax benefits. a. Use a Credit Card for Year-End Charitable Contributions You can charge by credit card your 2014 annual contributions to a qualified charity. If you used a credit card to make the contribution before year end, you can claim the deduction on your 2014 income tax return, even if you wait until 2015 to pay your credit card balance. b. Donate Appreciated Long-Term Capital Assets to Charity Consider donating appreciated long-term capital assets to charity. You may claim a charitable deduction equal to the full fair market value of the property you donate (subject to income limitations) while any regular income tax on the appreciation in value is avoided. Note, however, that for tangible property this favorable treatment is only available if the donated item is related to the exempt purpose of the donee charity. Planning Point: If you own long-term appreciated property (e.g., stock) that you expect to appreciate more and you want to continue to hold that property and benefit from further appreciation, consider using cash that you would otherwise give to charity to buy additional property of the same type and contribute the property you first owned to charity. Not only will you get a deduction equal to the full fair market value of the property you contribute to charity, you will have a higher basis in the newly acquired property, thus reducing the amount of taxable gain if you sell it. c. Deduction Limits for Contributions The amount of a charitable contribution deduction that an individual taxpayer can claim may be limited based on the type of property contributed and the type of charitable organization that receives the contribution. Generally, an individual s contribution deduction for cash contributions cannot exceed 50% of that individual s AGI. Contributions of

16 appreciated long-term capital gain property are generally subject to a 30% limitation. d. Charitable Contributions for Vehicles A taxpayer considering donating a used car to a charity should be aware of new automobile donation rules that apply to such a donation. In the case of donated cars (as well as boats and planes) with a claimed value of more than $500, if the charity sells the vehicle without any significant intervening use or material improvement, the amount of the taxpayer s charitable deduction cannot exceed the gross proceeds the charity received from the sale. Charities are supposed to advise donors whether there will be a sale. However, taxpayers may want to inquire how the charity expects to handle the donated vehicle before the contribution is made. e. Substantiation of Charitable Contributions Charitable contributions must be substantiated to be deductible. For all cash donations, a bank record or written receipt from the charity is required. For any donation of $250 or more, a written acknowledgement from the charity is required which includes the value of any goods or services you received in exchange for your donation. For noncash charitable contributions which exceed $5,000 for a single item or a group of similar items, a donor must obtain a qualified appraisal. 10. Assessing Alternative Minimum Tax Exposure Individuals must compute their income tax liability under two systems the regular tax system and the alternative minimum tax system and pay the higher of the two amounts. Although AMT was originally designed to apply only to wealthy taxpayers who received too much benefit from certain tax breaks, the current rules subject many unsuspecting taxpayers to AMT. The initial step in tax planning is to assess your exposure to AMT. A strategy that is effective for regular tax purposes can backfire for AMT purposes because of differences in how certain deductions and income exclusions are handled. You need to understand your AMT position in order to properly assess tax planning options. State and local taxes, unreimbursed employee business expenses, and miscellaneous itemized deductions are not deductible in computing AMT. You should exercise caution when deciding to accelerate these deductions into the current year or bunch deductions in alternate years to maximize total deductions. If you are subject to AMT, you could lose part or all of your deductions. For example, you may want to consider paying your fourth quarter state estimated tax payment in January rather than in December if a December payment will cause you to pay AMT.

17 A common cause of AMT liability for executives is the exercise of incentive stock options, since the bargain element (the excess of the stock s fair market value at the time of exercise over the option price) is taxable income for AMT purposes. Staggering the exercise of ISOs and selling stock acquired from previous ISO exercises are effective AMT planning strategies. Planning in the year of exercise is particularly important if the ISO stock declines dramatically in value. Regular business depreciation is computed utilizing a more accelerated method than is used for AMT depreciation. For this reason, partners in partnerships and shareholders of S Corporations that invest heavily in depreciable assets need to consider the AMT adjustments generated by their businesses. The K-1 you receive from the business will indicate your AMT adjustment. Finally, you should note that tax-exempt interest from private activity bonds increases your AMT income. This interest includes income earned on bonds you hold directly or through mutual funds. 11. Estimated Tax Payments Most individuals are required to pay their taxes during the year through wage withholding, quarterly estimated taxes or both. Estimated tax payments may be necessary if you have significant income from sources other than wages. To avoid underpayment penalties, your withholding taxes and/or estimated taxes for 2015 generally must equal or exceed 90% of your 2015 tax liability, or 100% of the tax shown on your 2014 return. A special rule applies to individuals with AGI for the previous tax year in excess of $150,000 ($75,000 for married filing separately). For 2015, these taxpayers must pay 110% of their 2014 tax or 90% of the 2015 tax, whichever is lower. You generally will not owe an estimated tax penalty if the tax shown on your individual return is less than $1,000. An alternative method of calculating your required estimated tax payments, called annualization, may be appropriate if your income is received or accrued more heavily later in the year. You may be able to vary your quarterly estimated tax payments to match the periods in which the income is earned.

18 2014 Individual Income Tax Rate Schedules Married Filing Jointly Or Surviving Spouse Taxable Income Base Tax Marginal Tax Rate (tax on next $) Not over $18, $ % Over $18,150.00, but not over $73, $1, % Over $73,800.00, but not over $148, $10, % Over $148,850.00, but not over $226, $28, % Over $226,850.00, but not over $405, $50, % Over $405,100.00, but not over $457, $109, % Over $457, $127, % Married Filing Separately Taxable Income Base Tax Marginal Tax Rate (tax on next $) Not over $9, $ % Over $ , but not over $36, $ % Over $36,900.00, but not over $74, $5, % Over $74,425.00, but not over $113, $14, % Over $113,425.00, but not over $202, $25, % Over $202,550.00, but not over $228, $54, % Over $228, $63, % Single Taxable Income Base Tax Marginal Tax Rate (tax on next $) Not over $9, $ % Over $9,075.00, but not over $36, $ % Over $36,900.00, but not over $89, $5, % Over $89,350.00, but not over $186, $18, % Over $186,350.00, but not over $405, $45, % Over $405,100.00, but not over $406, $117, % Over $406, $118, % Head of Household Taxable Income Base Tax Marginal Tax Rate (tax on next $) Not over $12, $ % Over $12,950.00, but not over $49, $1, % Over $49,400.00, but not over $127, $6, % Over $127,550.00, but not over $206, $26, % Over $206,600.00, but not over $405, $48, % Over $405,100.00, but not over $432, $113, % Over $432, $123, %

19 Investment Tax Strategies Some investors saw significant changes in the way their investment income was taxed for 2013.New, higher rates were in place for some investors on their investment income, while a broader swath found themselves subject to a new surtax. Some were relieved to find they were untouched altogether. Although we ve been through a full filing season with these new provisions, a review of some of the specifics of these rules is warranted to ensure you know how you may be impacted and what steps you might take to mitigate this impact. By Bob Jordan, CPA Partner Right off the bat, however, it should be emphasized that the tax you pay is but one variable in your economic investment decision. If your investment strategy was a sound one before these tax law changes, a wholesale change is not likely warranted. Two New Laws Impacted 2013 Investors had to brace for the impact of two new laws impacting their investment income in Those provisions are equally applicable to 2014 and future years. The American Taxpayer Relief Act (ATRA) signed into law January 2, 2013 affected the rates at which certain investment income is taxed. The Patient Protection and Affordable Care Act (ACA) enacted in 2010 layered a surtax on investment income for some taxpayers in 2013 and succeeding years The ACA calls for a 3.8% surtax on the lesser of net investment income or the amount by which modified adjusted gross income exceeds $250,000 for joint filers or $200,000 for single filers. Note these threshold amounts are unchanged from 2013 as they are not indexed for inflation. Net investment income includes, among other things, interest, dividends, certain annuities, royalties, rents, capital gains, and passive activity income. Excluded is tax exempt interest. This tax applies in addition to any increased rates under ATRA. To those taxpayers that breathed a sigh of relief when they saw that the provisions of ATRA were aimed at taxpayers in the $400,000 plus range, you re not out of the woods yet. You may still be subject to the 3.8% Medicare surtax under ACA. Capital Gains and Dividends For 2014, long-term capital gains and qualifying dividend income are subject to a tax rate of only 15% for taxpayers in the regular tax brackets of 25, 28, 33, and 35% and 0% for taxpayers in the lower regular tax brackets. In other words, no change from the 2012 treatment for these taxpayers (save for the possible imposition of the 3.8% Medicare surtax mentioned above). The change made here by ATRA is to increase the rate to 20% on capital gains and qualified dividends only for taxpayers in the 39.6% bracket. For 2014 income above

20 $406,750 (single) $432,200 (head of household) and $457,600 (joint filers) would place a taxpayer in the 39.6% bracket. Still, even after tacking on another 3.8% Medicare surtax, this preferred rate is still quite attractive. Recent statements from the White House indicate that rates as high 28% on certain long term capital gains are being considered; but with a Republican controlled Congress such an additional hike seems unlikely in the short term. Lower Tax Rates on Dividends The favorable tax rates set out above (20%, 15% or 0% plus a possible 3.8%) still make dividend-paying stocks attractive. While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends do. Only dividends paid by so-called qualified foreign corporations, which include foreign corporations traded on an established U.S. securities market (including American Depository Receipts), corporations organized in U.S. possessions, and other foreign corporations eligible for certain income tax treaty benefits, are eligible for the lower rates. Therefore, from a tax perspective, if an individual is going to invest in dividend-paying stocks, it is advisable to verify that those stocks qualify for favorable tax rates. However, as noted earlier, an individual s investment decisions should not be based on tax savings alone. An individual s overall investment philosophy, including his or her risk tolerance, diversification and long and short-term goals and objectives, among other things, need to be considered as well. Lower Tax Rates on Capital Gains To be eligible for the lower capital gains rate, a capital asset must be held for more than one year. When disposing of your appreciated stocks, bonds, investment real estate or other capital assets, pay close attention to the holding period. If it is less than one year, consider deferring the sale so that you can meet the greater than one-year rule. Once again, it should be noted that tax implications alone should not drive investment decisions. However, tax implications should not be ignored, especially if selling a security held for more than a year is consistent with an individual s investment goals and objectives. When selling stock or mutual fund shares, the general rule is that the shares you acquire first are the ones you sell first. However, if you choose, you can specifically identify the shares you are selling when you sell less than your entire holding of a stock or mutual fund. Now required for most publicly traded stocks and mutual fund shares are basis reporting requirements for brokers on sales of covered securities. Essentially, a covered security includes all stock acquired beginning in 2011 and mutual fund shares acquired in 2012 as well as other option, debt instruments, and futures contracts acquired in thereafter.

21 As discussed in greater detail below, by notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it is a long-term or short-term gain or loss. Timing Decisions One of the greatest areas of investment planning flexibility comes from your ability to time your investment transactions for maximum tax benefit. Often the change of a few days in the timing of sales or acquisitions of stocks or bonds can make a significant difference in the way a transaction is taxed. Now that it s 2015, you should monitor your mix of realized gains and losses throughout the year. When the end of 2015 approaches, you ll be prepared to add up all the gains and losses you have realized to date and compare them with the unrealized gains and losses in your portfolio. As with most planning decisions, economic factors in the market should take precedence over tax considerations. You should not hold on to an asset just because you don t want to pay tax on the gain. Conversely, you should not sell an asset just to take a tax loss if you think that the asset will rise in value. Capital gains are especially fertile areas for planning. You typically have greater control over when the income is realized than you do over your salary or business income because you decide when to sell. On the other side, you should be aware of the rules governing the deduction of capital losses. Your net capital losses are deductible on a dollar-for-dollar basis against net capital gains. Excess losses are allowed to offset up to $3,000 of ordinary income ($1,500 if you are married and filing separately). Losses remaining after the limit may be carried forward indefinitely. Because of these rules, if you have an excess of gains over losses, you should consider selling loss property to offset the excess gains and eliminate the tax on them. Wash Sales On occasion, you may want to recognize a loss on a security in the current year without abandoning your investment. One technique is to sell the loss security and then reacquire the same security. No deduction is allowed, however, for such a loss if you acquire substantially identical securities within a 61-day period beginning 30 days before the sale and ending 30 days after it. If you need to use a wash sale, therefore, you can get your loss deduction by using the following techniques: Wait at least 31 days before repurchasing the loss securities. The risk of this technique is that you forego any gain on the stock that occurs during the waiting period.

22 Double up, that is, buy a second lot that is equal to the original holding, wait 31 days, and then sell the original lot, thereby recognizing the loss. This strategy allows you to maintain a continuing interest in the stock, but you have to tie up additional funds for at least 31 days to accomplish it, and you double your downside risk. Sell the loss stock and reinvest in the stock of another company in the same industry that has historically performed the same way as the loss stock. After 31 days, you can reverse the process to restore your original holding. This method reduces your risk of missing out on a significant upward price movement during the waiting period. Keep in mind, sales of a security at a gain are not subject to the wash sale rules. Shifting Capital Gains Tax through Gifts If you are in a 25% tax bracket or higher, the lower capital gains tax of 0% for individuals in a 15% or 10% tax bracket provides an incentive for you to give stock or mutual funds to children or grandchildren who are in a 15% or lower tax bracket. Substantial tax savings can be achieved by such gifts. If you are interested in helping a child or grandchild with future college costs, your ability to shift your capital gains tax by making a gift takes on even more significance. For example, assume grandparents gift stock or mutual funds to their grandchild in If the grandchild sells the asset and is in the 10% tax bracket in the year of the sale, the maximum long-term capital gains rate would be 0%. Keep in mind however, that all children under 18 and children 18 to 23 who do not provide more than 50% of his or her support through earned income are subject to the so-called Kiddie Tax on unearned income in excess of $2,000. The Kiddie Tax serves to tax this excess at the parents marginal rate if that rate is higher than the child s. Another simple but effective technique is to consider using appreciated stock for charitable giving. By using appreciated stock for charitable giving, you can conserve cash for other uses and maximize the value of your charitable gifts. Subject to certain limitations, you can deduct the fair market value of the stock and avoid paying any capital gain tax on long-term appreciated property held for more than one year. This strategy can dramatically reduce the cost of making a charitable gift or increase the amount you can afford to give. Further, accounts known as donor advised funds exist to allow you to fund multiple years charitable objectives in the current year using appreciated securities while receiving a current year charitable contribution deduction. Generally, these monies can then be parceled out in succeeding years according to your wishes at that time. Additional Capital Gain Considerations Although it always is important to keep the holding period for long-term capital gains in mind, there are a number of other specialized rules that also may come into play when you make your investment decisions. The following is an overview of some of these additional considerations:

23 Collectibles If you hold certain collectibles for more than 12 months, any gain will be taxed at a maximum capital gains rate of 28%. Collectibles do not qualify for the lowest capital gains rate of 15 or 20%, even if you hold them for more than 12 months. However, the gain will not be taxed as ordinary income unless you hold the collectibles 12 months or less. The term collectibles generally includes such items as works of art, antiques, rugs, gems, stamps and coins. Alternative Minimum Tax If you are liable for AMT, your AMT will be calculated using the same capital gains rates that are used to compute your regular income tax. Mutual Funds and Other Pass-Through Entities The favorable capital gains rate applies to long-term capital gains distributed by certain pass-through entities (e.g., mutual funds, real estate investment trusts and S Corporations). The entity is required to inform the taxpayer concerning the proper classification of distributions (e.g., short-term or long-term). Sale of Principal Residence For many individuals, their biggest investment takes the form of their principal residence. Many individuals will be able to sell their homes and not have to pay any federal income tax on their realized gain. Married couples may exclude up to $500,000 of gain. For all other taxpayers, a $250,000 exclusion applies. Retirement Accounts Because of the favorable treatment of capital gains and dividends under the tax law, those investors with retirement funds in a taxable account (in addition to their IRA, 401(k) or other tax-deferred retirement accounts) should consider holding stocks in their taxable account and holding their bond allocation in the tax-deferred accounts to increase tax efficiency. Remember, all withdrawals from your tax-deferred retirement accounts are taxed at ordinary rates regardless of source, capital gains or dividends. Interest on bonds, however, is taxed at ordinary rates anyway, so consider deferring it as long as possible by holding the bond allocation in the tax-deferred accounts making up your retirement portfolio. Mutual Funds Cost Basis Elections Beginning in 2012 your broker was required to report cost basis information on sales or redemptions of mutual fund "covered securities" to both the IRS and you. Mutual funds covered securities are those funds purchased through a broker/mutual fund company in 2012 and later. When a mutual fund redemption occurs the broker is required to assign a cost basis at that time. Once the transaction takes place, you'll be unable to change the cost basis at a later date. Therefore it is important that you revisit your cost basis election with