Year-end income-tax planning, as 2014 winds down, consider some of the following suggestions for saving on your taxes both this year and in 2015.
Pay Fourth Quarter Estimated State Taxes Early
Taxpayers who itemize on their federal returns may deduct any state income taxes paid during 2014. Paying fourth quarter estimated taxes (generally due in January) by the end of 2014 can increase tax savings. However, this strategy may not benefit taxpayers subject to the alternative minimum tax (AMT).
Increase Retirement Savings
Employees enrolled in retirement savings plans may, prior to year-end, increase their pretax contributions, which would decrease taxable income.For 2014, employees may make contributions to their 401(k), 403(b), and 457 (b) retirement plans of up to $17,500, plus an additional $5,500 for those 50 and older. (Additional plan limits may apply.)
For 2014, the limit for deductible contributions to an individual retirement account (IRA) lesser of compensation or $6,600, and individuals 50 and older may contribute an additional $1,000.
Even if a spouse has no earnings, he or she may make a contribution if the working spouse has sufficient compensation to cover their combined IRA contributions. Note that the deduction for IRA contributions may be limited if you (or your spouse) are covered by a retirement plan at work and your adjusted gross income exceeds certain limits.
Take Required Minimum Distributions (RMDs)
Generally, individuals 70-1/2 or older who have IRAs or retirement plan accounts must take their RMDs before the end of the calendar year. Failure to do so may result in a 50% penalty on withdrawals not taken. Taxpayers who tum 70-1/2 in 2014 may wait until April 1, 2015, to take their first RMD. However, this decision should be considered carefully since a second RMD will have to be taken before the end of 2015, and the two RMDs may considerably increase taxable income for 2015.
Minimize the 3.8% NII Tax
Higher income taxpayers will have to pay an extra 3.8% surtax on the lesser of (1) net investment income-NII or (2)-the·amount by which their modified adjusted gross income exceeds certain thresholds ($250,000 for joint filers or surviving spouses, $125,000 for those married and filing separately, and $200,000 for single and head-of-household filers). Planning opportunities for reducing NIl include increasing contributions to qualified retirement plans, transforming passive business activities into active business activities, deferring capital gains through the use of installment sales, and eliminating capital gains with offsetting capital losses.
S Corp Shareholders
To preserve its eligibility, an S corporation must observe a number of strict requirements. The corporation may have only one class of stock and no more than 100 shareholders. Each shareholder must fall within the following approved categories:
- Individual U.S. citizens or residents
- Decedents' estates • Bankruptcy estates
- Certain tax-exempt charitable organizations
- Specific types of domestic trusts (grantor trusts, voting trusts, certain testamentary trusts, Qualified Subchapter S trusts (QSSTs), electing small business trusts (ESBTs), and tax exempt qualified plan trusts)
Transfer of shares to an ineligible shareholder will cause the S corporation to automatically lose its eligibility as of the date of transfer. A." a precaution, provisions in the corporation's charter, bylaws, and/or the individual shareholder agreements v.ill typically prohibit transfers to ineligible entities.
Please contact us if you'd like to discuss your tax situation.