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Year End Tax Planning

Now is the time to consider year end planning and whether you can benefit by some easy strategies to minimize your 2014 income tax liability.

Consider deferring income or accelerating business expenses to manage your susceptibility to the Medicare surtax of 0.9% and net investment income tax of 3.8% enacted as part of the Affordable Care Act
The Medicare surtax of 0.9% and the net investment income tax of 3.8% are assessed when a single individual’s adjusted gross income exceeds $200,000 and a married couple’s adjusted gross income exceeds $250,000.  If you believe you are close to these thresholds, you have a savings opportunity by managing your 2014 income level.  Some examples may include asking an employer to defer a 2014 bonus to January 2015, timing your capital gains and losses, or accelerating business expenses into 2014.  Call us if this is something that may apply to you.

Consider aggregating medical expenses
If you expect that your medical expenses will exceed 10% of your income in 2014, consider pre-paying for some of your expected 2015 expenses before December 31st, 2014.  This will allow you to receive the tax benefit for those medical expenses on your 2014 tax return, in which you can see the benefit as early as April, 2015.

Does your income exceed the Roth IRA contribution limit but you still want to contribute?  Consider supersizing your Roth IRA
Consider making an after tax contribution to your 401(k) plan, if your plan allows such contributions.  The plan may allow in-service distributions which will allow you to immediately transfer these contributions to a Roth IRA.  Without in-service distributions, you will need to wait until your employment terminates to rollover the funds.  This strategy will not reduce your 2014 tax liability, but it will assist you in socking away valuable money for retirement that will grow tax-free.  You can take advantage of a contribution in 2014 and begin again in 2015 with new contributions.  See our October 2014 newsletter for further details.

Do you expect to be in a low tax bracket in 2014?  Consider a Roth IRA conversion
If you expect to be in a low tax bracket and currently have retirement funds in an Individual Retirement Account (IRA), consider taking advantage of your low tax bracket to convert some retirement funds to a tax-free Roth IRA.  The conversion amount is taxable, but then grows tax free for the remainder of your lifetime, and some or all of your beneficiaries’ lifetimes.

Review capital gains and losses
Review your realized and unrealized capital gains and losses to determine whether any action should be taken prior to year end.  Your realized and unrealized gains and losses should be reviewed in connection with your other income to determine whether there is an opportunity to realize gains without incurring the 3.8% net investment income tax enacted under the Affordable Care Act.  All investment decisions should also make economic sense for your situation and should not be undertaken purely for tax benefits.

Maximize your deductible retirement contributions
Review your current year to date contributions to your deductible retirement plans, which may include your 401(k) plan, 457 plan, 403(b) plan, and Individual Retirement Account.  If you are financially able to increase your contributions prior to year end, you will reduce your taxable income by the amount of your additional contributions.

Required Minimum Distributions
If you are over 70 ½ years old, you are required to take distributions from your individual retirement accounts.  Remember to take these distributions prior to December 31st to avoid a penalty.  If you turned 70 ½ in 2014, consult with us to determine the best time to take your first distribution.

Maximize your health savings account contributions in 2014
If you are a participant in a high deductible health insurance plan, you likely have a health savings account.  This account is the vehicle in which you can save money for medical expenses and obtain three valuable tax benefits.  The contributions are tax deductible, reducing your taxable income.  They grow tax deferred, and are withdrawn free from tax if they are used for unreimbursed medical expenses.  See our February 2014 newsletter for additional tips to maximize the use of your health savings account.

Have a happy and safe holiday!  Best wishes for the New Year; we look forward to seeing you in 2015!

If you have questions about any of the topics discussed in this newsletter, please feel free to call us. 

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