Year End Tax Planning Summary For Individuals, Part 2

hands and papers on deskIt’s that time of year where we should think about preparing an estimate of your current year tax liability and see if we can reduce that liability.

Income Subject to Top Tax Rate

For 2014, the amount of income subject to the top tax rate of 39.6 percent increased from the 2013 amounts to $457,600 (married filing jointly), $406,750 (single individuals), $432,200 (head of household) and $228,800 (married filing separately).

Net Investment Income Tax

The net investment income tax is a 3.8 percent tax on net investment income that took effect in 2013. Besides applying to invest- ment income, the tax also applies to income from trades or businesses of the taxpayer that are passive activities. An activity is not generally considered passive if the taxpayer materially participates. If you are engaged in an activity which may be considered passive and thus has the potential to trigger the net investment income tax, we should evaluate the seven factors that determine material participation to see if your business can escape the net investment income tax.

Affordable Care Act (‘Obamacare’)

Beginning in the 2014 tax year, most individual taxpayers will be required to obtain health insurance, either through their employ- er or independently on a health insurance exchange marketplace, or risk facing a tax penalty. In 2014 the penalty is either $95 per adult ($47.50 per child) or 1% of income, whichever is higher. In some situations, the amounts of these penalties will increase in 2015. If you or your family members do not have health insurance, it may make sense for us to evaluate your options by comparing the amount of the potential penalties with the cost of obtaining coverage.

Alternative Minimum Tax (AMT)

If you are subject to the alternative minimum tax (AMT), your deductions may be limited. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under the AMT.

IRA Considerations

In 2014, the waiting-period rule on IRA rollovers changed, and not to your benefit.
While the rule used to be that the one-year waiting period between rollovers applied on
an IRA-by-IRA basis, the courts and IRS determined that it applies on an aggregate basis instead. This means that you cannot make a tax-free IRA-to-IRA rollover if you’ve made such a rollover involving any of your IRAs in the preceding one-year period. This new rule applies beginning in 2015. However, the rule does not affect your ability to transfer funds from one IRA trustee directly to another, because such a “trustee-to-trustee transfer” is not a rollover and, therefore, is not subject to the one-waiting period.

Self-directed IRAs have become increasingly popular in recent years because they allow an IRA owner to have more control over the type of investments that will be held in the IRA. This higher degree of flexibility in choosing IRA investments allows the IRA owner to invest in assets with greater wealth-building potential. However, the large amount of money held in self-directed IRAs makes them attractive targets for fraud promoters. Thus, self-directed IRA can be costly if not properly managed. In addition, because of the types of investments taxpayers with self-directed IRAs are able to make, taxpayers have a greater risk of running afoul of the prohibited transaction rules. The prohibited transaction rules impose an excise tax on certain transactions – such as sales of property, the lending of money or extension of credit, or the furnishing of goods, services, or facilities – between an IRA and a disqualified person. If you have a self-directed IRA, we need to review the specifics of your arrangement.

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About cozbycpa

Heather L. Cozby is a CPA on the South Shore and Cape Cod. The managing partner of Cozby & Company, LLC, Heather has the resources and experience necessary to provide quality professional services on a timely basis and at a reasonable cost. She specializes in tax planning & preparation; audit, review & compilation services; management advisory services; bookkeeping; and accounting. Her unique niche is in working with homeowners’ associations and condominium trusts, advising with rental real estate, and providing outsourced financial consulting for mid-sized companies. She is more entrepreneurial than most accountants, and offers the best of both worlds - providing the services of a larger firm while retaining the ability to connect with her clients on a personal level.
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