As year-end approaches, remember to check your 2014 federal income tax return for items that can affect your 2015 planning. Here are three to look for.
Capital loss carryover. If your capital losses exceeded your capital gains in 2014, you may be able to carry any unused loss to future years. You can apply the loss against 2015 capital gains as well as up to $3,000 of other income – a benefit to remember when you’re rebalancing your portfolio over the next few months.
Tip: Keep track of your capital loss carryforward for alternative minimum tax planning and projections. In some cases, this amount can be different from the carryforward calculated for your regular income tax.
Charitable contribution carryover. Was your charitable donation deduction limited for 2014 or prior years? You may have a carryover that you can use if you’re going to itemize on your 2015 tax return.
Tip: Take this carryover into consideration when planning your 2015 donations so you don’t lose the benefit of older unused amounts. Charitable contribution carryforwards have a five-year life.
Net operating loss carryover. If your business had a loss in 2014, you had to make an election to carry the entire loss forward to 2015. Otherwise, the general rule of carrying the net operating loss back two years applies, with the remainder carried forward 20 years.
Give us a call to schedule a tax planning appointment. We’re ready to help you get the most benefit from these and other carryovers, such as investment interest, tax credits, and passive activity losses.
The 2010 Affordable Care Act added a 40% excise tax on high-cost employer-sponsored health insurance (sometimes called “Cadillac” plans). “High-cost” means plans with an annual cost of more than $10,200 for an individual and $27,500 for a family. Beginning in 2018, the tax applies to the amount above that limit. The tax is assessed annually and is permanent, nondeductible, and applicable to many types of health coverage.
Because of its potentially broad impact, you’ll want to start reviewing the health insurance coverage you offer to employees to learn how your business will be affected.
The IRS is just beginning to issue guidance. We’ll keep you informed as information is released
Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.
If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.
For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.
For more ideas on how to maximize your vehicle-related deductions, contact us.
Now may be a great time to refinance because mortgage rates are still low but expected to increase. Before deciding to refinance, however, here are a couple of tax consequences to consider:
1. Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt and deductible interest is subject to a $100,000 debt limit.
2. Prepaying interest. “Points” paid when refinancing generally are amortized and deducted ratably over the life of the loan, rather than being immediately deductible. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. But if you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.
Is your head spinning? Don’t worry; we can help you understand exactly what the tax consequences of refinancing will be for you. Contact us today!
Are your beneficiary designations up to date? Do you know which accounts have beneficiaries, and whom you’ve designated? It’s easy to lose track. But it’s important to keep them current. Here’s why.
When you designate a beneficiary for an account, that person inherits the assets in the account, regardless of what your will says. That’s why updating your will periodically might not be enough. Typically, you’ll have beneficiaries for each of your IRAs, your 401(k) or other retirement plans, annuities, and insurance policies.
Your designations could be out of date because of life changes. For example, since you made your initial choices, you might have married, had children, or divorced. Some of the beneficiaries you chose could have died, divorced, or married.
Changing tax laws also affect beneficiary designations. Choosing the wrong beneficiary, or failing to name a contingent beneficiary, can affect the long-term value of your IRA assets after you die.
Make reviewing and updating beneficiary designations part of your year-end financial review. Give us a call if you need help.
Whether you should take social security retirement benefits at the earliest possible date or defer benefits until reaching normal retirement age (or even age 70), depends on several factors. For example, you’ll want to consider your overall health and life expectancy, your plans to earn income before reaching normal retirement age, anticipated returns on your other investments, and, surprisingly, your guess about the future of the social security program. As you can tell, the decision isn’t one-size-fits-all.
For instance, say your savings won’t cover ongoing expenses and you need to rely on social security income to make ends meet. In that case, deferring social security benefits may not be an option for you.
But if your financial circumstances offer more financial flexibility, deferring your benefits can be an advantage. For each year, you delay (up to age 70), the payouts increase. In addition, if you plan to earn significant income between age 62 and your normal retirement age (65-67, depending on the year you were born), putting off your social security benefits may make sense. That’s because any benefits in excess of specified limits ($15,720 in 2015) will be reduced. You’ll lose $1 of benefits for every $2 in earnings above the limits. Note that you won’t lose any social security benefits (regardless of earnings) once you reach full retirement age.
On the other hand, let’s say you’ve accumulated a healthy balance in your 401(k) and expect that account to generate a good annual return. Under this scenario, you might be better off leaving your retirement savings alone and taking your social security benefits early to cover living expenses.
Or perhaps your family has a history of health problems and you don’t realistically expect to live into your 80s. Again, taking social security benefits at age 62 might be a good choice.
For help with this important decision, please give us a call.
Would you like to give your child a head start on smart money habits? Here’s a suggestion: Have the child invest in a Roth IRA. Why? The tax-free compounding of contributions and investment returns over your child’s lifetime is a great wealth-builder. Here’s what you need to know.
- There is no minimum age to open a Roth IRA account. All your child needs is earned income, either from a summer job or from self-employment.
- The maximum contribution to a Roth IRA for 2015 is $5,500. Your child can contribute less and you can provide some or all of the cash, up to the amount of your child’s earned income.
- Your child won’t receive a federal tax deduction for a Roth IRA contribution – and will pay no federal income tax on qualified distributions taken after age 59½.
- You can continue to claim your child on your tax return as a dependent. Your child is also allowed a federal standard deduction of $6,300 for 2015, which means the first $6,300 of earned income is income-tax free.
- If you own a business and can employ your child, you can benefit from additional tax savings, including a payroll deduction for your business. In addition, depending on how your business is organized, you may not have to pay federal payroll taxes such as FICA, Medicare and unemployment. Remember, your child must perform real services and the wages can’t be excessive.
- An early Roth IRA withdrawal could affect your child’s college financial aid. Your child can take withdrawals from a Roth penalty-free to pay for college costs. But those withdrawals generally count as income when applying for financial aid.
Are you interested in learning more? Give us a call. We’ll help you get started on saving for your child’s future.
Contributing to a traditional employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, offers many benefits:
- Contributions are pre-tax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
- Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
- Your employer may match some or all of your contributions pretax.
For 2015, you can contribute up to $18,000. If your current contribution rate will leave you short of the limit, consider increasing your contribution rate through the end of the year. Because of tax-deferred compounding, boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.
If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2015). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.
Have questions about how much to contribute? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.
Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but generally only to the extent that they exceed 10% of your adjusted gross income.
Taxpayers age 65 and older can enjoy a 7.5% floor through 2016. The floor for alternative minimum tax purposes, however, is 10% for all taxpayers.
By “bunching” nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.
If it’s looking like you’re close to exceeding the floor in 2015, consider accelerating controllable expenses into this year. But if you’re far from exceeding it, to the extent possible (without harming your or your family’s health), you might want to put off medical expenses until next year, in case you have enough expenses in 2016 to exceed the floor.
For more information on how to bunch deductions or exactly what expenses are deductible, please contact us.
Even if you’re covered by a credit monitoring service, you may want to keep an eye on your credit report – and you can still do that for free at http://www.annualcreditreport.com. That’s the only official website, so don’t be fooled by other “free” claims.
At the site, you can get one free report annually from each of the three major agencies. Why bother? Identity theft is a multi-billion dollar industry, and checking your credit rating is one of the best ways to protect yourself. You might also be surprised at the number of mistakes on credit reports. Relatives or even non-relatives with the same (or similar) last name could have their credit information jumbled with yours. Individual companies could have incorrectly reported a negative credit occurrence (in the form of a delinquent payment or nonpayment) to the reporting agencies. Reviewing your credit report is a way to find and fix those issues.
If you find an error, both the credit reporting company and the company that provided the information about you are responsible for making corrections. You’ll have to submit a written report and you’ll get written results when corrections are made.
Give us a call if you’re having problems with your credit reports. We’re here to help.