2014 & 2015
Standard Mileage Rates:  

Per Mile

Business:

2014 $0.56

2015 $0.575

Medical / Moving:

2014 $0.235

2015 $0.23

Service of Charitable Organizations:

2014 $0.14

2015 $0.14

Did you move or

change your email address in 2014?

Call or email the office and let us know!

Greetings! 

One thing to consider is how to maximize the value of your tax deductions. This is especially relevant when you no longer have the mortgage interest deduction. When this is the case, it is often advantageous to bunch your deductions into one year, so that you alternate years in which you itemize deductions with years in which you take the standard deduction. The goal of this is to claim the larger deduction each year; one year it will be itemized deductions and the next it will be the standard deduction. For example, let's say that you will itemize deductions in 2015 and you will claim the standard deduction in 2016. This means that you will pay your property taxes in January and December, 2015. Maybe you can do the same thing with your charitable contributions (especially if you gift appreciated stock), and if you need a new vehicle, you will also purchase one in 2015, to get the benefit of the additional sales tax deduction.

One potential drawback to this approach is that you might be subject to the Alternative Minimum Tax (AMT) in the years you itemize because state and local taxes (i.e., property tax and income/sales tax) are not deductible for calculating AMT. So it is possible that you inadvertently expose yourself to AMT when you bunch your property taxes and car purchases into the same year, reducing the benefit of this tax reduction strategy.

Since 2013, individuals are subject to this tax which is equal to 3.8% of the lesser of:

1. Net investment income (NII) or

2. The excess (if any) of modified adjusted gross income (MAGI) over the appropriate threshold amount. The threshold amount is not adjusted for inflation and is based on filing status:

   1. Married Filing Jointly or Qualifying Widow(er) - $250,000

   2. Single or Head of Household - $200,000

   3. Married Filing Separately - $125,000

Generally speaking, net investment income consists of taxable interest, ordinary dividends, taxable portion of annuity payments from non-qualified plans, royalties, rental income, and capital gains (it does not include distributions from IRAs and qualified plans).

Since the NII Tax (NIIT) applies to the lesser of two amounts as explained above, the appropriate strategy to lessen or eliminate the tax depends on which one exposes you to the tax.

Strategies to reduce net investment income include:

1. earn tax-exempt interest instead of taxable interest; 
2. invest retirement account money in actively managed mutual funds that generate large capital gain distributions and invest taxable account money in tax-efficient funds and ETFs;
3. sell securities with loss positions to generate capital losses;
4. gift appreciated securities to IRS-approved charities instead of selling them;
5. mitigate the impact of a single big transaction, such as selling a business or vacation home, by considering an installment sale to spread the gain over several years or swapping the property for another property in a Section 1031 exchange.

Strategies to reduce modified adjusted gross income include the same ones above to reduce NII. In addition, consider ways to reduce your taxable income by deferring income into the next year and maximizing contributions to qualified retirement accounts and health savings accounts. However, do consider the future when Required Minimum Distributions (RMDs) from retirement accounts could unexpectedly boost your adjusted gross income. There is a balance between managing income in the current year to reduce taxes and subjecting yourself to higher RMDs in the future. Individuals who have reached age 70 ½ may also want to consider making charitable contributions from their IRA (see more on that in one of the topics). 

Most individuals are familiar with the concept of tax loss harvesting whereby securities in a taxable account with a loss position are sold in order to offset other gains or reduce income by up to $3,000. One of the things to watch for here are violations of wash sales rules, which state that no loss deduction is allowed for any loss from any sale or other disposition of stock or securities if within a period beginning 30 days before and ending 30 days after the sale the taxpayer acquires, or has entered into a contract or option to acquire, substantially identical stock or securities. One way taxpayers inadvertently trip over the wash sale rule is when dividends are automatically reinvested. Notice also that the description does not say anything about the transactions occurring in the same account; the wash sale rule will be violated if the transactions occur within different accounts; for example, selling the security in the taxable account and buying it back in a retirement account.

One unintended consequence of tax-loss harvesting followed by buyback is that you are setting yourself up for a potentially larger capital gain later when the security is eventually sold. If the capital gains rates are the same in each of the years, then the tax loss is preferential because of time value of money considerations, but it is less clear cut if the future capital gain rate is higher.

Fewer individuals engage in a practice called gain harvesting. This is advantageous when capital gains can be recognized at little or no additional tax cost. The security is then repurchased thereby gradually increasing the cost basis in the security. There are no "wash sale" type rules that must be followed when engaging in this practice. 

As mentioned in the introduction, House recently passed an extender bill to renew a series of tax deductions and credits that expired. Assuming that this legislation is approved by the Senate and signed by the President .....

For an individual who has reached the age of 70 ½, a contribution to an IRS-qualified charity from his/her IRA will be excluded from gross income (not to exceed $100,000) and will count towards the amount that must be withdrawn from all retirement accounts according to Minimum Required Distribution rules. The contribution must be made by December 31, 2014 and it must be distributed directly to the charity by the IRA trustee. While the contributed amount cannot be counted as a tax-deductible charitable contribution, it does not increase gross income, which can affect future Medicare premium rates (Medicare premiums are based on Modified Adjusted Gross Income (Adjusted Gross Income plus Tax-Exempt Interest) from the most recent tax return) and reduce or eliminate a potential Net Investment Income Tax if that RMD makes you subject to that tax (see amounts in NIIT article above). 

 
Doris Cloud 

This newsletter is for general guidance only, and does not constitute tax advice or professional consulting. Before any action, consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information.