Tax Planning for 2014

This year's tax planning is going will focus heavily on timing of income and expenses, as the Medicare investment tax (MIT) of 3.8% can create an additional tax burden.  Taxpayers should be advised that some tax benefits available in 2013 are not available in 2014, as Congress has allowed some provisions to lapse. These provisions, which include bonus deprecation, larger section 179 deductions (expensing depreciable assets in the year of purchase), and a number of tax credits, such as the Research and Development Credit, may be reinstated, but with the gridlock in Washington, it is unpredictable.

 

Assuming that your income is high (above $400,000 in 2014), consider the following income shifting ideas:

1. Pay your real estate taxes, personal property taxes and state income taxes before year end in order to decrease your taxable income by increasing your itemized deductions.  (Note: These deductions can phase out and/or be limited by alternative minimum tax [AMT].)
2. Reduce income by taking advantage of other tax-exempt investment vehicles, such as muni bonds, which are tax-free for federal purposes, and, in most states, home-state bonds are also state tax-exempt for state purposes. (Note: Keep AMT in mind with private activity bonds).
3. “Depreciate” using a Section 179 deduction of up to $25,000.
4. Congress still has not reinstated the Research and Development credits or nonbusiness energy credits, but given their popularity will likely do so before year end. Plan on them being reinstated, but understand the potential risks.
5. With the business energy credits remaining, capitalize on investments that creative these credits. These credits are for taxpayers that install solar, geothermal, combined heat and power (CHP), geothermal heat pump, fuel cell, micro-turbine or transition energy property for use in their business. The credit can be as much as 30 percent of the cost of the property.
6. Timing of capital gains and capital losses so that you do not inadvertently exceed the MIT limits and create an increased tax liability.
   1. Consider a 1031, tax free exchange, where possible.
   2. Consider an installment sale as it will delay the recognition of the gain until the funds are received.
   3. Consider taking losses to offset gains (Note: Losses themselves are limited to $3,000 a year in excess of gains.  Also, selling at a loss and repurchasing at least 31 days later avoids wash sale rules).
7. Maximize contributions to retirement accounts to reduce current year income.
8. Minimize distributions from retirement accounts.

All of the ideas above assume the need to reduce income for this year.  The converse may be true.  If you anticipate a very strong 2015 and your income is significantly lower in 2014, it may be effective to employ the opposite strategy and increase your income for this year.  Keep in mind that, by accelerating income and reducing expenses, you will be paying taxes early and the earning potential of those early tax payments should also to be considered.

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Future of Donating [Donors to Gay Causes Consider Their Next Steps]

Interesting article on how the charity landscape has changed since the repeal of DOMA. http://ow.ly/FjRRU


"After a number of legal victories on same-sex marriage, where should longtime supporters put their money now? And will today’s triumphs make tomorrow’s donors think the struggle for gay equality has already been won?"

The RDP Advantage™

There is a little known rule that is available to help Registered Domestic Partners (RDP) in community property states.  This rule, when applied to a couple in the correct circumstance, can result in a significant federal income tax refund.  We call the application of this rule, the RDP Advantage™.

With the RDP Advantage™, RDP couples can report their taxable income in the most advantageous way possible.  This may involve reporting wages on one partner’s tax return, both returns or splitting it between the two partners.  The benefits can be even greater if the couple has children.

Since tax nuances at their best are dull, we will demonstrate how the RDP Advantage™ can be applied by presenting an actual case study from our office:   Spoiler Alert, the couple saved an extra $60,000 in income taxes and got that money back as a tax free refund. 

M and D are registered domestic partners who adopted two children in 2010.  M works as an employee and earns $250,000 annually.  D is a stay at home parent.  When the couple came to our company (AdoptFund, Inc., our adoption credit division) they had been told they were not entitled to a refund from the IRS, not for their adoption, or for any other reason.   A friend of theirs, our client, referred M&D to our office to see if we could help them get money back from the IRS.  At first, it appeared that M&D were not eligible for a refund, but when we looked at applying the RDP Advantage™ to their tax situation, everything changed. 

1. Their tax status changed, resulting in an immediate refund of $5,000;
2. The applied tax rates resulted in an additional $30,000 refund (over two years);
3. The application of the RDP Advantage™ reduced each taxpayer’s income below the adoption credit threshold resulting in an additional $25,000 in refunds.
4. Net refund (before accrued interest) more than $60,000.

These results were better than most because of the income differences between the partners and the adoptions in the affected years.  If there had been no adoption credit, this couple would have still received about $30,000 in tax refunds.    Imagine what you can do with this tax free refund!

As mentioned above, the RDP Advantage™ is only available in community property states that recognize Registered Domestic Partnerships.  Currently, the four states are California, Nevada, Oregon and Washington.  If you live in those states and are in an RDP, you may be eligible for this special tax treatment.  Feel free to use our Refund Calculator to see if you are eligible for a refund or call or email our office for a free consultation. 

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