2014 Tax Organizer Is Ready!

It’s time to begin your “gathering process” for your annual taxes.  Botz Deal’s 2014 Tax Organizer is now available. The organizer will make you aware of items in your personal life that will affect your current year’s income taxes and provide a place to record this information.  Once you begin using this organizer on an annual basis, it will also indicate all figures on last year’s tax return to serve as a reminder for the current year.

Taxpayers attaining age 70 1/2 in 2014: start RMDs this year or wait till 2015?

Taxpayers who attain age 70 ½  in 2014 have until their required beginning date of April 1, 2015, to begin making required minimum distributions (RMDs) from their IRAs. As a general rule, they also must begin RMDs from their qualified retirement plan accounts by that date (non-5% company owners who continue working may, however, defer RMDs until April 1st following the year they retire). This article explains when these taxpayers should consider taking their first-year’s RMDs from their IRAs and/or qualified retirement plan accounts before the end of 2014. It also shows when such taxpayers should take their first RMD after year-end.

Background In general, the first distribution year is the year in which the IRA or qualified plan account owner attains age 70 ½. The taxpayer may postpone the first year’s RMD until the second distribution year (i.e., make the first-year RMD by April 1st of the second year). However, taking advantage of the three-month “grace period” for the first distribution year’s RMD does not absolve the taxpayer from making an RMD for the second distribution year.

Example: Betty, a widow, celebrated her 70th birthday on March 1, 2014, and will be 70 ½ this year. She is the owner of a traditional IRA that had a value of $1,370,000 on December 31, 2013. Her RMD for 2014, the first distribution year, is $50,000 ($1,370,000 divided by 27.4, for an individual who is 70, Betty’s age at her birthday in 2014). Betty may delay taking this distribution until as late as April 1, 2015, but even if she does, she must still take an RMD for 2015. Assume that Betty does not take the first distribution in 2014, and the value of her IRA is $1,391,250 on December 31, 2014. Her RMD for 2015 will be $52,500 ($1,391,250 divided by 26.5, for an individual who is 71). By delaying taking her first distribution until 2015, Betty must take total distributions of $102,500 in that year ($50,000 for the 2014 required distribution, and $52,500 for the 2015 required distribution). Delaying taking the first year’s RMD until the second distribution year could have one or more of the following effects:

  1.  All or part of the first distribution may be taxed at a higher rate than it would be if it was distributed in the first year.
  1.  The resulting increase in the distributee’s adjusted gross income for the second distribution year may cause a reduction in deductions and/or credits subject to an AGI floor, such as:
  • the deduction for medical expenses;
  • total itemized deductions;
  • the deduction for personal exemptions; and
  • the amount of nonpassive income that can be offset by passive losses from an active participation rental real estate activity.
  1. The large distribution may cause the taxpayer’s modified adjusted gross income (MAGI) to exceed the threshold amount that triggers the 3.8% surtax on net investment income.
  1. Lower-income distributee’s social security benefits may be subject to tax.

When it may be advisable to delay taking the first distribution until the second distribution year:   

There are situations when it will be advisable for an individual who attains age 70 ½ in 2014 to delay taking the first (2014) distribution from a traditional IRA or a qualified plan until 2015. Here are key examples:

(A)   The distributee expects to be in a lower tax bracket in 2015. This could result from the  distributee having lower taxable income from other sources in 2015.

(B)    Taking the first distribution in 2014 will cause the distributee’s modified adjusted gross income (MAGI) to exceed the threshold amount that triggers the 3.8% surtax on net investment income, but deferring the distribution until next year will not have the same effect because the distributee’s income from other sources will be lower. The threshold amount of MAGI is $250,000 for joint filers or surviving spouses, $125,000 for marrieds filing a separate return, and $200,000 in any other case. (C)    The distributee expects that taking two distributions in 2015 won’t cause any part of the total distribution to be taxed at a higher rate than it would be taxed at if the distributions were taken in 2014 and 2015. By deferring the 2014 distribution to 2015, the distributee can continue to earn tax-deferred income on the first distribution for up to an additional three months.

(D) If the distributee expects to have less income from other sources in 2015, deferring the 2014 distribution to that year may enable the distributee to avoid or minimize AGI limitations in 2014 without causing any increase in those limitations in 2015.

Eight Ways to Cut Your 2013 Taxes!

You may not consider autumn a “second spring,” as one famous philosopher did, but there’s no question that this time of year is a second season for tax planning.  Here are ideas to consider now that can lead to a lower federal income tax bill for 2013.

1.  Make a charitable contribution from your IRA.  If you’re 70 1/2 or older, a donation to a qualified charity made directly from your traditional IRA counts as a required minimum distribution.  The savings:  no penalty for failing to take your annual RMD and no increase in income.

2.  Increase retirement plan contributions.  Pre-tax contributions to plans such as a 401(k) lower your taxable income.  You may also qualify for a tax credit, which can reduce what you’ll owe on your 2013 return.

3.  Undo a Roth conversion.  You have until October 15 to change your mind about last year’s decision to convert your traditional IRA to a Roth.  One reason to consider re-characterizing:  an account balance that’s less than when you made the original conversion, due to changes in market value.

4.  Install energy-efficient improvements.  Upgrades to your home, such as windows, doors, and insulation, can qualify for a lifetime tax credit of as much as $500.  That’s a direct dollar-for-dollar reduction of tax liability.

If you’re looking into solar improvements such as water heaters or panels, you may be eligible for an additional credit of up to 30% of the cost.

5.  Look at itemized deductions.  The standard deduction for 2013 is $12,200 when you’re married filing jointly ($6,100 when you’re single).  If you’re close to the threshold, consider accelerating deductible expenses.  For example, you can add sales tax paid on a new vehicle to the IRS standard amount when claiming the itemized deduction for state and local sales tax.

6.  Keep side-business expenses tax-deductible.  One difference between a hobby and a business is the amount of the tax deduction.  Hobby losses are only deductible to the extent of the income from the hobby, and generally you have to itemize to benefit.  If you operate your business as a sideline to your main job, now’s the time to make sure you’ll meet the tests to claim deductions at year-end.

7.  Put equipment in service by year-end.  Buy, lease, or finance equipment before December 31 — and make sure you’re using it in your business — to take advantage of this year’s Section 179 and bonus depreciation rules.

For 2013, the maximum section 179 deduction is $500,000.  Bonus depreciation lets you write off up to 50% of the cost of assets.

8.  Hire your kids.  The familiar summertime tax tip works well in fall, too.  Some benefits:  a deduction for your business, income for your children that’s not subject to the kiddie tax, and the opportunity to establish a tax-deferred retirement account with the earnings.

Call us for more tax-saving ideas you can put in place before December 31.  (636) 946-2800