2014 year-end individual and entity income tax planning ... · retirement plan options, maximizing...

11/20/14

Financial Professional Use only 1

2014 Year-End Individual and Entity Income Tax Planning and Update

November 19, 2014

Presented to:

Norfolk & Plymouth Estate and Business Planning Council

Financial Professional Use Only

Presented By:

Stephen ColellaPartner

[email protected]

DiCicco, Gulman & Company LLPWoburn, MA | Boston, MA

p: 781-937-5300 | www.dgccpa.com

Jon BicknellFinancial Advisor

[email protected]

Investors Capital CorpBurlington, MA

www.investorscapital.com

11/20/14



Introduction

This presentation will discuss the following: Tax Law updates,

Income tax planning considerations, including minimizing the Medicare surtax hit,

Retirement plan options,

Maximizing charitable deductions,

Tax driven investment choices,

Estate and Gift tax planning, and

Tax planning for Businesses.


Tax Extenders

• No action yet from Congress on the 57 Individual and Business tax provisions that expired in 2013 and 6 tax provisions that are set to expire at the end of 2014.

• Expected vote in either November/ December 2014, or possibly even January 2015.

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Year-end Planning

Understanding your client’s tax situation and keeping everything in context Current tax rate

• AMT

• Capital gain trap

• 3.8% tax on NII

• 0.9% tax on earned income

• Marginal rate

Expiring deductions, credits, and carryovers

Carryover tax benefits


Tax Landscape

Top ordinary income tax rates at 39.6% ($458K MFJ/$407K single) – indexed for inflation

Qualified dividends and LTCG tax rate 20% for taxpayers subject to the 39.6% tax rate, else 15%

3.8% Medicare tax on investment inc + 0.9% Medicare on wages & SE inc over MAGI thresholds of 250K (MFJ) / 200K (S) – same as 2013

Medical Expense thresholds at 10% except for taxpayers over 65, but AMT threshold continues to be 10% for all taxpayers – same as 2013

Taxpayers in AMT may consider prepaying state taxes to minimize 3.8% Medicare Surtax

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Deferral/acceleration of income/deductions

• Which items of income/deduction does the taxpayer have CONTROL over?

• Consider multi-year tax projections in order to analyze impact of timing on overall taxes.

Timing is Everything


Timing is Everything

PLANNING NOTE:

If you have a client who has peaks and valleys in income such that some years might be above the thresholds and some years below, control the timing of income and deductions to avoid the high brackets and/or Medicare taxes in some years.

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• Categories – Creating the right mix :

– Taxable Investments

– After Tax / Tax Deferred

– Pre Tax / Tax Deferred

– Tax Favored

• Factors to take into account :

– Current and Future tax brackets

– Current Holdings / Annual Savings to category

– Other Income stream in retirement

– Pre 59 ½ need or not

Your Wealth – Categories


– Interest Income

– Dividend Income

– Capital Gains

– Considerations: • Liquidity

• Flexibility for use

• Estate Planning – step up in basis

Taxable Investments

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• Deductible IRA’s

• Retirement Plans – 401(k), 403(b), etc

– Considerations:• Current year Income Tax deduction

• Future Ordinary Income tax due

• Balance Current / Future brackets

Pre Tax / Tax Deferred


• Non Qualified Variable Annuities

– Considerations• Tax Deferral

• Future Taxation– Ordinary Income

– Tax Favored – Return of Capital

• Inherited Stretch Annuity

• Pass in Kind – then Stretch

• Post Death 1035 exchange – then Stretch

After Tax / Tax Deferred

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• Roth IRA’s / 529 Plans– No tax deduction , Tax Free Income

• Municipal bonds– Tax Free Income

• Life Insurance– Tax Deferred Growth

– Tax Free Death Benefits / Loan’s

• Oil & Gas– Intangible Drilling Costs, Depletion

Tax Free / Tax Advantaged


• Everything in context

• Investment Location – Stocks vs. Bonds

• Accumulation– Tax bracket dependent

• Retirement– Balance / Use Taxable pre 70 ½

• Estate Planning– Pass efficient assets

Creating the right mix

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Medicare Surtax

The Medicare surtax is equal to 3.8% on the lesser of a high income earning individuals’:

Net Investment Income (NII) or

Modified Adjusted Gross Income over 250K (MFJ) / 200K (S)


Medicare Surtax

Net Investment Income is the excess of the following over any allowable deduction properly allocated to such income:

Interest, dividends, annuities, passive royalties, & non-passive income/loss from trader K-1s

Gross income from trade or business of trading in financial instruments or commodities

Gross income from PASSIVE trade or business & rents

Net gain from disposition of property not held in an active trade or business

PFIC income should already be included in interest and dividends above

If Real Estate Professional falls within the safe harbor DO NOT include the related income in this calculation

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Medicare Surtax

PLANNING NOTE:

Taxpayers with higher incomes should differentiate and substantiate income derived from an active business from their passive investment income to shield income from surtax.


Capital gains/losses 20%/15%/0% rates made permanent

Harvesting and/or warehousing losses

Wash sale rules for losses

Worthless investments, including abandonment

Installment sales

Non-business bad debts

Deferring gains to 2015

Year-end Planning

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Salary Review of withholding to avoid estimated tax penalties

Inquire about year end bonuses

Exercise of nonqualified stock options when value is low and ordinary tax rates are low, if possible

Year-end Planning


Charitable planning

AGI limitations

Tax rate of benefit

Use of donor advised fund or private foundation

Long term, appreciated publicly traded securities

Exclusion from gross income of qualified charitable

distribution for RMD, was NOT EXTENDED for 2014

Itemized deductions phase-out for 2014 applies to higher

income taxpayers 300K (MFJ)/ 250K (S) (indexed for inflation)

Year-end Planning

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Community Investment Tax Credit

GOAL: To enable local residents and stakeholders to work with and through

community development corporations to partner with nonprofit, public and private

entities to improve economic opportunities within the community

The tax credits are equal to 50% of the donation made by individual or corporate

taxpayers.

Tax credits are applied against MA tax liability, and are REFUNDABLE.

Contributions to CDCs are also deductible for federal purposes, subject to

interplay with MA

Year-end Planning


Roth conversions No income limit for Roth IRA conversions

Full or partial conversions

Factors to consider:

• Years to retirement

• Tax rates now vs. later

• Assets needed at retirement

• Tax paid from non-retirement assets

• Charitable use

• Current tax attributes

If have recharacterized a prior conversion, consider re-converting after 30 days

Consider timing – now versus early 2015

Interplay with 3.8% Medicare tax

Year-end Planning

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• Business– SIMPLE IRA

– SEP IRA

– 401(k) - Safe Harbor 401(k)

– Single (k) Plan

– Profit sharing – Integrated / New Comparabilty

– Defined Benefit

– Cash Balance Plan

Retirement Plan Considerations


Retirement Plan Illustrations

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Retirement Plan Illustrations


Year-end Planning

Schedule C and E deductions

1099s need to be issued

Accelerate expenses and defer income

Consider retirement plan option

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Residential tax credits 30% of qualified solar, small wind, geothermal

property (no limit) placed in service before 2017

Education credits American Opportunity Credit (formally the Hope

Credit) up to $2,500/year for 4 years (thru 2018) 100% phase out for MAGI 180K (MFJ) / 90K (S)

Planning opportunity for clients above income threshold whose children have taxable income

Income Tax Update


Other items:

Safe harbor estimates 110% of 2013 tax if AGI >$150K

100% of 2013 tax if AGI < $150k, or

90% of 2014 tax

INCLUDING MEDICARE TAXES

Income Tax Update

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Income Tax Update

Other items to consider:

Kiddie Tax continues to apply to students under 24

Consider refinancing old debts

Consider borrowing against securities


Annual gift exclusion of $14K in 2014 and expected to stay the same in 2015.

Lifetime gift and GST exemption $5.34M/ taxpayer for 2014 (expected to be $5.43M/taxpayer in 2015).PLANNING NOTE – Taxpayers who previously

“maxed out” their $5M have the ability for additional gifting due to inflation adjustments.

Estate and Gift Update

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Foreign Reporting Update

Continued focus on international activity

Foreign Bank Account Reports (FBAR)

Foreign Account Tax Compliance Act (FATCA) – no regulations are issued for entities at this time – this may again be a reprieve for the current year tax filing


Professional Excellence on a Personal Level

Questions?

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Depreciation - Tax Breaks that Expired at End of 2013 and Have Yet to Be Renewed Increased limitation of $500K in Section 179 expenses, $2M

phase-out threshold, and expanded definition of Section 179 property

Bonus depreciation

Fifteen-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements

Business Asset Expensing Rules


Section 179 Deduction Without Congressional action, Section 179 deduction limit

decreases from $500K in 2013 to $25K in 2014

Phase-out threshold drops significantly from $2M in 2013 to $200K in 2014 (deduction is reduced dollar-for-dollar if investments exceed $2M in 2013 and $200K in 2014)

Provision allowing up to $250K of Sec. 179 expensing for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property expires after Dec. 31, 2013


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Bonus Depreciation Since 2008, businesses were able to deduct 50% or more of

qualifying assets (typically, tangible personal property and leasehold improvements)

Provision expired after Dec. 31, 2013

15-year Straight Line Cost Recovery for Qualified Leasehold, Restaurant and Retail Improvements Provision allowing a shortened recovery period of 15 years – rather

than 39 years – for qualified leasehold-improvement, restaurant and retail-improvement property expires after Dec. 31, 2013



Section 179 vs Bonus Depreciation Section 179 deduction covers new and used assets while bonus

covers only new assets (with a recovery period of 20 years or less as well as off-the-shelf software)

Sec. 179 is based upon when taxable years starts while bonus is based upon when assets are placed in service

Calendar year taxpayers: no difference

Fiscal year taxpayers: have until the end of their 2013 tax year to place assets in service to qualify for Sec. 179 deduction but only until Dec. 31, 2013 to qualify for bonus


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Section 179 vs Bonus Depreciation Sec. 179 allowed only to the extent of taxable income derived from

the active conduct of a trade or business while bonus is not subject to any income limitations (can generate or increase a loss)



State 179 Expense Allowed Investment Expense Limit

BonusAdj. Required?

MA Follows Federal Yes

CA $25,000 Limit $200,000 Phase-Out Yes

CT Follows Federal Yes

ME Follows Federal Yes

NH $20,000 Limit No Phase-Out Provided Yes

NY Follows Federal Yes

RI

Follows Federal for Assets Placed in Service on or after 1/1/2014

$25,000 Limit for Assets Placed in Service Prior to 1/1/2014

$200,000 Phase-Out for Assets Placed in

Service Prior to 1/1/2014

Yes

VT Follows Federal Yes

Rules By State

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2013 2014

Equipment purchases: $600,000

Sec. 179 deduction 500,000 0

50% bonus depreciation 50,000 N/A

First year depreciation 10,000 120,000

Total first year deduction 560,000 120,000

Cash savings (@ 35%) 196,000 42,000

Equipment cost after tax 404,000 558,000

Example


Tax Planning Opportunities: First, take Sec. 179 on all used equipment; second, take full Sec.

179 on assets with the longest life; third, take bonus on all new assets that qualify; fourth, take normal depreciation on remaining value

Bonus depreciation is not mandatory; a decision is not required until a return is filed. Certain taxpayers should consider electing out of bonus to spread deductions more evenly over future years

Consider a cost segregation study, if taxpayer purchased or built a building or remodeled existing space

Business Planning

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Other Tax Breaks that Expired at End of 2013 and Have Yet to Be Renewed Research and experimentation tax credit

Work Opportunity Tax Credit (WOTC)

Special rules for qualified small business stock

Reduction in S corporation recognition period for built-in gains

Section 179D energy efficient commercial building deduction

Business Planning


Research Credit Congress is likely to extend this credit, as it has done

repeatedly since it was established in 1981

Credit may be claimed for increases in business-related qualified research expenditures

Applies to the excess of qualified research expenditures for the tax year over the average qualified research expenditures measured over four preceding years

Business Planning

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Research Credit Planning Note. Regardless of whether the credit is restored,

investigate whether a business is eligible for the credit for previous years. The IRS issued new regulations in June allowing taxpayers to claim missed ASCs for open tax years by filing amended returns.

Business Planning


Research Credit - Proposed Changes AMT turnoff

Creation of a refundable credit for start-up companies in their first 5 years (R&D against business/payroll taxes capped at $250K per year)

Increase the Alternative Simplified Credit (ASC) from 14% to 20%

Make the ASC permanent

Business Planning

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Work Opportunity Tax Credit Designed to encourage hiring from certain disadvantaged

groups (such as veterans and individuals receiving certain government benefits)

Generally equal to 40% of a worker’s first year wages up to $6,000 (qualified wage cap varies by group)

Business Planning


Special rules for qualified small business stock 100% gain exclusion applies to qualified small business

stock acquired after Sep. 27, 2010, and before Jan. 1, 2014, and held for more than five years

Exclusion drops back to 50% for stock issued after Jan. 1, 2014

Business Planning

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Five-year recognition period for built-in gains of S corporations American Taxpayer Relief Act of 2012 reduced the built-in

gain recognition period to five years for 2012 and 2013 tax years

The recognition window reverts to 10 years beginning in 2014

Business Planning


Section 179D energy efficient commercial building deduction Energy efficient renovations and upgrades to buildings

qualify

Lighting and HVAC systems that meet certain energy efficient standards often qualify

Maximum deduction of $1.80 times the square footage

The deduction expires on January 1, 2014

Business Planning

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Deducting Accrued Year-End Bonuses Bonuses accrued but not paid by year-end could still be

deductible in the year services are performed if the following requirements are met:

The employee does not own more than 50% of the corporation’s value; S-Corporation not eligible for accrued bonus deduction for employee-shareholders

The bonus is properly accrued before the end of the year

The bonus is paid within two and a half months of the following tax year and the employee’s rights to the compensation are fixed by the end of the year

Business Planning


Deducting Accrued Payments to Related Parties Accrual basis taxpayers can only deduct amounts owed to cash

basis related parties in the year that the expenses are paid

Make sure that accrued payments are made prior to the year end

Related parties generally include:

Greater than 50% shareholders of C corporations

All Personal Service Corporation shareholders

All S Corporation shareholders

All partners or LLC members

The limitation applies not only to related parties themselves, but also to their relatives.

Business Planning

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S-Corp and Partnership Basis Review

If planning to a loss, check if shareholders have enough basis to take the loss

Other Y/E Considerations


Employee vs. Independent Contractor

Repair/Capitalization Final Regulations Issues (263a)-Long awaited Regulations issued – effective Jan. 1, 2014

Health Care Reform-beginning in 2015

Employer shared responsibility payment delayed

If fewer than 50 full-time employees exempt for any year

If at least 50 but fewer than 100 full-time employees exempt until 2016

If 100 or more full-time employees, employers subject to the employer mandate starting in 2015, with certain relaxed standards

State Issues

Business Planning

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Year end planning discussions with business owners should include the following:Changes in nature of business

Geographical expansion

Estate planning and shifting of value

Business Planning


Professional Excellence on a Personal Level

Questions?

THANK YOU!!

2014 year-end individual and entity income tax planning ... · retirement plan options, maximizing...

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