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Make Planning and Income Minimization a Priority (High-Income Taxpayers)

Affluent taxpayers have many incentives for proper tax planning. In addition to recent hikes in income tax and dividend and long-term capital gains taxes, the 3.8% net investment income tax became effective in 2013. This tax applies to single filers with modified adjusted gross income (AGI) of more than $200,000 and joint filers whose modified AGI exceeds $250,000.

The range of investment income subject to the 3.8% tax is broad – including interest, dividends, capital gains, rental and royalty income, non-qualified annuities and businesses that are considered “passive activities.” We can help you find ways to minimize taxable income and to avoid generating passive income.

Consider New Developments in Health Care

  • Following the rollout of the Affordable Care Act, some taxpayers may be eligible for a premium tax credit if they buy health care coverage through the government’s Health Insurance Marketplace, fall within certain income limits or meet other qualifications.
  • If you didn’t have minimum essential health care coverage in 2014, you may have to pay either $95 per person ($47.50 for a child under 18) limited to a family maximum of $285 or 1% of your yearly household income that’s above a certain filing threshold. This penalty will rise in 2015.
  • Flexible spending accounts (FSA) can help you lower taxes by setting aside pretax dollars to cover medical bills. In the past, you may have been reluctant to contribute to FSAs because you risked losing money you didn’t spend by year-end. You can now contribute up to $2,500 to an FSA in any year, and new rules allow you to carry over as much as $500 from one year to the next.

Don’t Overlook the Alternative Minimum Tax (AMT)

The AMT is a separate tax calculation that is aimed at ensuring high-income taxpayers pay a minimum amount of tax. However, it increasingly affects middle-income taxpayers. And you may be surprised at some of the triggers that subject you to the AMT. These triggers generally include items that can provide you with substantial deductions, such as:

  • paying high state or local taxes;
  • cashing in stock options;
  • spending home equity line dollars on something other than a home improvement;
  • reporting business depreciation on your return;
  • reporting many miscellaneous deductions; or
  • even having a large number of dependents The AMT exemption did increase for 2014, to $52,800 for single taxpayers (up from $51,900) and to $82,100 for married couples filing jointly (up from $80,800). There are several ways to plan for the AMT; for example, you can lower taxable income through retirement account contributions or by managing the capital gains or dividends you receive.

Seize Retirement Plan Opportunities

There’s still time to make contributions to retirement accounts. We urge you to take full advantage of your retirement contribution options for the possible tax benefits now and the income security later. In 2014, you can contribute up to a total of $5,500 ($6,500 if you’re 50 or older) to a traditional or Roth IRA. Contributions to a traditional IRA may be tax-deductible, depending on your income and on whether you’re covered by an employer’s retirement plan.

In addition, there are income limits for contributing to a Roth IRA. For those who are self-employed or own a small business, the contribution limits are significantly higher.

Anticipate Expiring Tax Benefits

Beneficial tax provisions that expired at the end of 2013 include a deduction for state and local general sales taxes, one for teachers’ out-of-pocket expenses and an above-the-line deduction for tuition and some related expenses. Those over age 70½ can no longer exclude from income any distributions made from individual retirement accounts to qualified charitable organizations.

In addition, if your home has gone through a foreclosure or short sale, you will now have to pay taxes on the amount of any mortgage forgiveness. (This rule may not apply if you are insolvent, however, so contact us for more information if you’re in this situation.)

Experts are divided on whether or not Congress will act to renew these laws this year, so it is best to prepare for any contingency to help reduce your tax bill. Now is the optimum time to engage in short- and long-term planning to meet your financial goals. We can help you understand your tax situation and determine the best steps to address your tax challenges and any other financial concerns. Please don’t hesitate to contact us today to schedule an appointment.

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