The 2012 American Taxpayer Relief Act and the Affordable Care Act (ACA) established higher tax rates , phased out and eliminated deductions and exemptions at high income levels, which caused many of my clients to experience “sticker shock” at their increased tax obligations.The legislation lifted the top ordinary income tax brackets and increased the maximum rate on capital gains and qualified dividends. The acts of congress also revived and permanently reinstated the phase-out of both itemized deductions (Pease Limitation) and Personal Exemptions Phase-out (PEP). In addition to the above the legislation changes introduced the 0.9% Medicare Hospital Insurance (HI) and the 3.8% Surtax on Net Investment Income (NII).
The following is a brief conversation about four different tax subjects: 1) income administration, 2) receiving of capital gains and qualified dividends, 3) charitable contributions and 4) family gifting.
Income deferral or deductions/credit acceleration reduces your tax bill. Deciding to accelerate or defer items of income, it is important to consider but the approaching years as well. Here are some typical approaches:
Defer billings and collections
Receive bonuses earned for 2014 in 2015
Sell appreciated assets in 2015
To increase deductions and credit acceleration, consider these ideas:
Pay bills tax deductible bills in 2014 this will accumulate itemized deductions into 2014 and take the standard deduction in 2015
Accelerate bill payments into 2014
RECEIVING OF CAPITAL GAINS AND QUALIFIED DIVIDENDS
Loss harvesting helps reduce capital gains. Selling securities at a loss to offset a capital gains tax liability. Loss harvesting is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains. Losses can be used, dollar for dollar, to offset realized gains and up to $3,000 of earned income. The unused losses are carried forward indefinitely. One caveat to this strategy is that loss harvesting is the wash-sale rule, which prohibits the purchase of a specific security within 30 days prior to or after the date at which the same security is sold for a loss.
Get acquainted with the limitations on the amount of the charitable contributions that are deductible based on the type of property being donated and whether the receiving charitable organization is public or private. The general limitations for public charities are: 50% of AGI for cash gifts, 50% of AGI for gifts of ordinary income property, and 30% of AGI for capital gain property. For private charities the general limitations are: 30% of AGI for cash gifts, 30% of AGI for ordinary income property, and 20% of AGI for gifts of capital gain property.
Maximize the value of the gift with appreciated securities. Usually, many individuals think first to write a check to the charity. In spite of this, appreciated securities may present a better strategy, especially when compared to selling securities on which capital gains tax must be paid to generate cash for the gift. The gift (and the charitable deduction) is valued at the fair market price of the stock on the date of the gift, which may be significantly more than the cost basis. This yields the same deduction without recognizing a gain.
There are also donor-advised funds, these funds have attractive features. Capital gains taxes are not paid on donated appreciated securities and appreciation within a donor-advised fund is not taxable. Also, the contributions are tax deductible in the year made, allowing for control over timing of deductions.
Utilize the annual exclusion. In 2014, an individual can make gifts up to $14,000 per recipient per year, free from gift taxes. A married couple can give gifts of $28,000 per recipient per year, without exceeding the annual exclusion. To put this into context, a married couple with three children can reduce their taxable estate by $84,000.
Take advantage frontloading a 529 Plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. The donor has the option to ‘frontload’ contributions without paying a federal gift tax. 529 plans allow a maximum of $14,000 per year can be contributed, or the donor can elect to make five years of contributions ($70,000) in one year.
Pay certain expenses directly. Unlimited payments for qualified medical and educational purposes can be made on behalf of another person without generating gift tax.
Peter Rudolph, CPA is a Senior Accountant with CPA Firm South Florida.