2014 Year-End Individual and Entity Income Tax Planning and Update - PDF document

11/20/14 2014 Year-End Individual and Entity Income Tax Planning and Update Presen Presented t d to: Norfolk & Plymouth Estate and Business Planning Council November 19, 2014 Presented By: Stephen Colella Jon Bicknell Partner Financial Advisor scolella@dgccpa.com jbicknell@investorscapital.com 781-937-5377 781-262-3030 Investors Capital Corp DiCicco, Gulman & Company LLP Woburn, MA | Boston, MA Burlington, MA p: 781-937-5300 | www.dgccpa.com www.investorscapital.com Financial Professional Use Only Financial Professional Use only 1

11/20/14 Introduction  This presentation will discuss the following:  Tax Law updates,  Income tax planning considerations, including minimizing the Medicare surtax hit,  Retirement plan options,  Maximizing charitable deductions,  Tax driven investment choices,  Estate and Gift tax planning, and  Tax planning for Businesses. Financial Professional Use Only Tax Extenders • No action yet from Congress on the 57 Individual and Business tax provisions that expired in 2013 and 6 tax provisions that are set to expire at the end of 2014. • Expected vote in either November/ December 2014, or possibly even January 2015. Financial Professional Use Only Financial Professional Use only 2

11/20/14 Year-end Planning Understanding your client’s tax situation and keeping everything in context  Current tax rate • AMT • Capital gain trap • 3.8% tax on NII • 0.9% tax on earned income • Marginal rate  Expiring deductions, credits, and carryovers  Carryover tax benefits Financial Professional Use Only Tax Landscape  Top ordinary income tax rates at 39.6% ($458K MFJ/$407K single) – indexed for inflation  Qualified dividends and LTCG tax rate 20% for taxpayers subject to the 39.6% tax rate, else 15%  3.8% Medicare tax on investment inc + 0.9% Medicare on wages & SE inc over MAGI thresholds of 250K (MFJ) / 200K (S) – same as 2013 Medical Expense thresholds at 10% except for  taxpayers over 65, but AMT threshold continues to be 10% for all taxpayers – same as 2013  Taxpayers in AMT may consider prepaying state taxes to minimize 3.8% Medicare Surtax Financial Professional Use Only Financial Professional Use only 3

11/20/14 Timing is Everything Deferral/acceleration of income/deductions • Which items of income/deduction does the taxpayer have CONTROL over? • Consider multi-year tax projections in order to analyze impact of timing on overall taxes. Financial Professional Use Only Timing is Everything PLANNING NOTE: If you have a client who has peaks and valleys in income such that some years might be above the thresholds and some years below, control the timing of income and deductions to avoid the high brackets and/or Medicare taxes in some years. Financial Professional Use Only Financial Professional Use only 4

11/20/14 Your Wealth – Categories • Categories – Creating the right mix : – Taxable Investments – After Tax / Tax Deferred – Pre Tax / Tax Deferred – Tax Favored • Factors to take into account : – Current and Future tax brackets – Current Holdings / Annual Savings to category – Other Income stream in retirement – Pre 59 ½ need or not Financial Professional Use Only Taxable Investments – Interest Income – Dividend Income – Capital Gains – Considerations: • Liquidity • Flexibility for use • Estate Planning – step up in basis Financial Professional Use Only Financial Professional Use only 5

11/20/14 Pre Tax / Tax Deferred • Deductible IRA’s • Retirement Plans – 401(k), 403(b), etc – Considerations: • Current year Income Tax deduction • Future Ordinary Income tax due • Balance Current / Future brackets Financial Professional Use Only After Tax / Tax Deferred • Non Qualified Variable Annuities – Considerations • Tax Deferral • Future Taxation – Ordinary Income – Tax Favored – Return of Capital • Inherited Stretch Annuity • Pass in Kind – then Stretch • Post Death 1035 exchange – then Stretch Financial Professional Use Only Financial Professional Use only 6

11/20/14 Tax Free / Tax Advantaged • Roth IRA’s / 529 Plans – No tax deduction , Tax Free Income • Municipal bonds – Tax Free Income • Life Insurance – Tax Deferred Growth – Tax Free Death Benefits / Loan’s • Oil & Gas – Intangible Drilling Costs, Depletion Financial Professional Use Only Creating the right mix • Everything in context • Investment Location – Stocks vs. Bonds • Accumulation – Tax bracket dependent • Retirement – Balance / Use Taxable pre 70 ½ • Estate Planning – Pass efficient assets Financial Professional Use Only Financial Professional Use only 7

11/20/14 Medicare Surtax The Medicare surtax is equal to 3.8% on the lesser of a high income earning individuals’:  Net Investment Income (NII) or  Modified Adjusted Gross Income over 250K (MFJ) / 200K (S) Financial Professional Use Only Medicare Surtax Net Investment Income is the excess of the following over any allowable deduction properly allocated to such income: Interest, dividends, annuities, passive royalties, & non-  passive income/loss from trader K-1s  Gross income from trade or business of trading in financial instruments or commodities  Gross income from PASSIVE trade or business & rents  Net gain from disposition of property not held in an active trade or business  PFIC income should already be included in interest and dividends above If Real Estate Professional falls within the safe harbor  DO NOT include the related income in this calculation Financial Professional Use Only Financial Professional Use only 8

11/20/14 Medicare Surtax PLANNING NOTE: Taxpayers with higher incomes should differentiate and substantiate income derived from an active business from their passive investment income to shield income from surtax. Financial Professional Use Only Year-end Planning Capital gains/losses  20%/15%/0% rates made permanent  Harvesting and/or warehousing losses  Wash sale rules for losses  Worthless investments, including abandonment  Installment sales  Non-business bad debts  Deferring gains to 2015 Financial Professional Use Only Financial Professional Use only 9

11/20/14 Year-end Planning Salary  Review of withholding to avoid estimated tax penalties  Inquire about year end bonuses  Exercise of nonqualified stock options when value is low and ordinary tax rates are low, if possible Financial Professional Use Only Year-end Planning Charitable planning  AGI limitations  Tax rate of benefit  Use of donor advised fund or private foundation  Long term, appreciated publicly traded securities  Exclusion from gross income of qualified charitable distribution for RMD, was NOT EXTENDED for 2014  Itemized deductions phase-out for 2014 applies to higher income taxpayers 300K (MFJ)/ 250K (S) (indexed for inflation) Financial Professional Use Only Financial Professional Use only 10

11/20/14 Year-end Planning Community Investment Tax Credit  GOAL: To enable local residents and stakeholders to work with and through community development corporations to partner with nonprofit, public and private entities to improve economic opportunities within the community  The tax credits are equal to 50% of the donation made by individual or corporate taxpayers.  Tax credits are applied against MA tax liability, and are REFUNDABLE.  Contributions to CDCs are also deductible for federal purposes, subject to interplay with MA Financial Professional Use Only Year-end Planning Roth conversions  No income limit for Roth IRA conversions  Full or partial conversions  Factors to consider: • Years to retirement • Tax rates now vs. later • Assets needed at retirement • Tax paid from non-retirement assets • Charitable use • Current tax attributes  If have recharacterized a prior conversion, consider re-converting after 30 days  Consider timing – now versus early 2015  Interplay with 3.8% Medicare tax Financial Professional Use Only Financial Professional Use only 11

11/20/14 Retirement Plan Considerations • Business – SIMPLE IRA – SEP IRA – 401(k) - Safe Harbor 401(k) – Single (k) Plan – Profit sharing – Integrated / New Comparabilty – Defined Benefit – Cash Balance Plan Financial Professional Use Only Retirement Plan Illustrations Financial Professional Use Only Financial Professional Use only 12

11/20/14 Retirement Plan Illustrations Financial Professional Use Only Year-end Planning Schedule C and E deductions  1099s need to be issued  Accelerate expenses and defer income  Consider retirement plan option Financial Professional Use Only Financial Professional Use only 13

11/20/14 Income Tax Update Residential tax credits  30% of qualified solar, small wind, geothermal property (no limit) placed in service before 2017 Education credits  American Opportunity Credit (formally the Hope Credit) up to $2,500/year for 4 years (thru 2018) 100% phase out for MAGI 180K (MFJ) / 90K (S)  Planning opportunity for clients above income threshold whose children have taxable income Financial Professional Use Only Income Tax Update Other items:  Safe harbor estimates  110% of 2013 tax if AGI >$150K  100% of 2013 tax if AGI < $150k, or  90% of 2014 tax INCLUDING MEDICARE TAXES Financial Professional Use Only Financial Professional Use only 14