Year-End Tax Planning Part 2: 2014 Tax Law Changes & Planning Ideas

/ December 22, 2014

For 2014 and subsequent years, the individual income tax rate schedules reflect a continuation of the rates in place for 2013. The 2014 individual tax rates are as follows:

Tax Rate                Income (Single Taxpayer)                 Income (Married Taxpayers)

10%                         Up to $9,075                                           Up to $18,150
15%                         $9,076 – $36,900                                  $11,151 – $73,800
25%                         $36, 901 – $89,350                               $73,801 – $148,850
28%                         $89,351 – $186,350                              $148,851 – $226,850
33%                         $186,351 – $405,100                           $226,851 – $405,100
35%                         $405,101 – $406,750                          $405,101 – $457,600
39.6%                     $406,751 or more                                 $457,601 or more

To accelerate deductions, these expenses are commonly prepaid as part of year-end tax planning:

  • Charitable contributions including contributions of appreciated securities held more than one year. With a contribution of appreciated securities, the taxpayer receives the full value of the stock as a charitable deduction, but does not have to include the built-in gain in income.
  • Prepayment of 4th quarter state and local income taxes (if not subject to Alternative Minimum Tax (AMT)).
  • To overcome certain Adjusted Gross Income (AGI) limitations on deductions, “bunch” deductions into one year.

taxes - iStockBeware of the Alternative Minimum tax trap

After all the complexities of AMT, its net effect is to throw taxpayers into higher tax brackets than they would otherwise be subjected to based on their income and the standard brackets. If it’s possible you will be subject to the AMT in 2014, you should consider deferring certain tax payments that are not deductible for AMT purposes, such as state income taxes, until 2015. Due to the complexity of AMT, the best way to determine if you might be subject to the AMT rules is to have a tax projection prepared. Very generally speaking, AMT becomes a concern for Minnesota residents as their income approaches $200,000 (single) or $250,000 (married filing joint).

Exploit Long-Term Capital Gains

If you hold a capital asset for more than one year before selling it, your capital gain is long-term. For most taxpayers, long-term capital gain is taxes at rates no higher than 15%. But taxpayers in the 10% and 15% ordinary income tax brackets have a long term capital gain of 0%. Taxpayers whose income exceeds the thresholds set for the relatively new 39.6% ordinary tax rate are subject to a 20% rate on capital gain. The thresholds are $406,750 for single filers and $457,600 for married filing jointly. Further complicating factors, anyone with modified AGI over $200,000 single or $250,000 married joint is also subject to the 3.8% tax on investment income. Remember that you can use capital losses to offset capital gains. If you lose more than you gain during the year, you can offset ordinary income by up to $3,000. Any remaining losses carry forward to next year.

Contribute to a Retirement Plan

You may be able to reduce your taxes by contributing to a retirement plan. If you are an employee, you generally must make the employee deferral portion of a retirement plan contribution prior to December 31. Traditional IRAs as well as other types of retirement plans available to businesses allow contributions as late as the due date for filing the 2014 tax return – April 15, 2015 or, if the return is extended, October 15, 2015.

If there is one thing we can assure you based on our years of experience, it is that every taxpayer’s situation is different. A strategy that works well for one taxpayer may have very different results for another. If you would like to discuss planning ideas for your specific tax situation, be sure to contact a tax professional.

The next post in this series on year-end planning will discuss taxes related to Health Care Reform.