2014 Quarter 4 Earlier this month we learned that Republicans will have a majority in both the House and Senate for the Congress that convenes in January 2015. The current Congress has still not acted on dozens of tax provisions that expired at the end of 2013 (the “tax extenders”), including the research tax credit, deductibility of sales taxes and expanded bonus depreciation. While Congress is expected to address these breaks during the lame-duck session, there is a chance that they may not be addressed until the new Congress meets in January and even if retroactively reinstated to the start of 2014, the extension could be for only one year. As 2014 draws to a close, there is still time to reduce your 2014 tax bill and plan ahead for 2015. This letter highlights several potential tax-saving opportunities for you to consider. Because many tax benefits are tied to or limited by adjusted gross income (AGI), a key aspect of tax planning is to estimate both your 2014 and 2015 AGI. When considering whether to accelerate or defer income or deductions, you should be aware of the impact that this action may have on your AGI and ability to maximize deductions tied to AGI. Another important number is your tax bracket, or the rate at which your last dollar of income is taxed. The tax rates for 2014 have not changed from 2013 but the brackets are indexed for inflation: Single Tax Rate 10.0% 15.0% 25.0% 28.0% 33.0% 35.0% 39.6% Married (Joint) Taxable Income (from/to) $0 9,075 36,900 89,350 186,350 405,100 406,750 $9,075 36,900 89,350 186,350 405,100 406,750 -- $0 18,150 73,800 148,850 226,850 405,100 457,600 $18,150 73,800 148,850 226,850 405,100 457,600 -- Long-term capital gains for most are subject to a Federal tax of 15 percent, but taxpayers in the 39.6 percent bracket will pay the top rate long-term gains rate of 20 percent. Short-term gains are taxed at an individual’s ordinary income tax rate. This year a person can give up to $14,000 per donee tax-free without reducing the donor’s estate or lifetime gift tax exclusion amount ($5.34 million per person in 2014). Married couples may double the amount of the exclusion to $28,000 per donee. Medical payments and tuition payments made directly to a post-secondary qualified institution do not count against this limit. The 2015 lifetime exclusion has been indexed for inflation to $5.43 million. 1401 EAST CARY STREET, SUITE 401, RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362 2014 Quarter 4 The penalty under the Patient Protection and Affordable Care Act (PPACA) for not having insurance in 2014 is the higher of 1 percent of household income or $95 per person. Penalties will be significantly higher in 2015. Expect new tax forms and filing requirements for both health insurance providers and individuals reporting health care coverage on their tax returns. Tax-saving opportunities continue for retirement planning through the availability of Roth IRAs, changes that make regular IRAs and 401(k)’s more attractive, and other retirement savings incentives. Now is the time to review your contributions made year-to-date to retirement plans and look for opportunities to save even more in December. If you are not covered by a retirement plan at work but you have earned income, you still may be able to contribute to a traditional IRA (deductible or nondeductible), SEP IRA, or a Roth IRA by April 15th. Non-working spouses also have an opportunity to 401(k), 403(b), 457, or TSP Traditional IRA Roth IRA SIMPLE SEP IRA Base contribution limit plus: if over 50 $17,500 $5,500 $5,500 $5,500 $12,000 $52,000 $1,000 $1,000 $2,500 -- contribute to an IRA based on the working spouse’s earned income. Roth IRAs are great retirement assets because earnings grow tax-free, distributions are tax-free, and there is no annual distribution requirement. Married taxpayers with earned income and AGI of $191,000 or less ($129,000 if single) may contribute up to the lesser of their earned income or $5,500 to a Roth IRA this year. If your income exceeds the threshold to contribute directly to a Roth IRA, there are three options: (1) a “Backdoor Roth”, (2) funds in qualified retirement plans may be rolled over, or converted, into a Roth IRA, or (3) employees may save money in an after-tax 401(k) plan, if eligible, and convert the after-tax contributions to a Roth IRA tax-free upon retirement or separation from the company (see our blog from earlier this month). Taxpayers age 70 ½ and older must take their required minimum distributions (RMDs) from traditional IRAs and other defined contribution plans (401(k), 403 (b), 457 or TSP) by December 31st. The IRS imposes steep penalties for failure to comply with annual distribution requirements. Remember, Roth IRAs do not have a required distribution – one more reason we love them. If you expect your AGI to be higher in 2014 than in 2015, you may benefit by deferring income into 2015. Deferring income will be advantageous as long as the deferral does not bump your income to a higher bracket next year. On the other hand, in some cases you may benefit by accelerating income into 2014. Year-end planning should look to avoid spikes in income and deductions that may push you into a higher bracket this year than next. 1401 EAST CARY STREET, SUITE 401, RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362 2014 Quarter 4  If you are over age 591/2 and have an IRA, consider taking withdrawals this year if you have little or no other taxable income. You may also want to consider a Roth IRA conversion.  Time the sale of assets to have offsetting capital losses and gains, if available. Your portfolio should be reviewed in December for any capital losses, as losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income.  An expense is only deductible in the year in which it is actually paid. If your tax rate is higher in 2014 than 2015 consider bunching itemized deductions into 2014, such as: o Medical expenses are deductible only to the extent that they exceed 10 percent of AGI (7.5 percent for taxpayers age 65 or older) – see below an exception for self-employed taxpayers o State income taxes paid are deductible for federal purposes, so pay all state taxes in December if you anticipate a state tax liability for 2014 and you are not subject to the AMT. o Pay next year’s real estate and personal property taxes by check, dated and mailed before January 1, 2015, or consider making a January mortgage payment in December to receive the extra interest deduction this year. o Making your charitable contributions at the end of the year will give you use of the money during the year but also allows you to claim a deduction for that year. If income will be lower in 2015, consider making two years’ worth of charitable contributions before year-end through a donor advised fund. To avoid capital gains, also consider giving appreciated stock to charity. Businesses that purchase equipment may make a “Section 179 Election,” which allows you to expense otherwise depreciable business property. For 2014, you may elect to expense up to $25,000 (down from $500,000 in 2013) of equipment costs. Unless extended, bonus depreciation, an accelerated depreciation deduction of 50% of the cost of business property, is not available for assets purchased in 2014. Increasing the Section 179 expensing limit and extending bonus depreciation are part of the “tax extenders” currently before Congress. Small businesses overwhelmingly support passing the extenders as historically these tax breaks have stimulated spending and growth. Self-employed individuals with earned income are allowed to claim 100 percent of the amount paid during the year for insurance for themselves, their spouses and dependents as an above-the-line deduction, without regard to the general 10 percent of AGI floor. Eligible small employers (less than 25 full time employees and an average annual per-employee wage of less than $50,000) may qualify for a credit of up to 50% of the expenses of purchasing health insurance for 1401 EAST CARY STREET, SUITE 401, RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362 2014 Quarter 4 employees. This year the credit is allowable only if health insurance is purchased through an exchange and is only available for two consecutive tax years. Tax planning can be complex and each taxpayer’s situation is unique. We would be happy to meet with you to discuss specific strategies. Margaret J. Smith, CPA [email protected] (804) 325-1450 This year Canal Capital Management expanded our service offering by adding tax return preparation and enhanced income tax planning. Our tax clients can expect to receive their organizers for the 2015 filing season by the end of December. If you are interested in becoming a tax client, please contact Margaret at (804) 325-1450 or [email protected]. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. 1401 EAST CARY STREET, SUITE 401, RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362