Items on your 2014 return can affect 2015 planning

As year-end approaches, remember to check your 2014 federal income tax return for items that can affect your 2015 planning. Here are three to look for.

Capital loss carryover. If your capital losses exceeded your capital gains in 2014, you may be able to carry any unused loss to future years. You can apply the loss against 2015 capital gains as well as up to $3,000 of other income – a benefit to remember when you’re rebalancing your portfolio over the next few months.

Tip: Keep track of your capital loss carryforward for alternative minimum tax planning and projections. In some cases, this amount can be different from the carryforward calculated for your regular income tax.

Charitable contribution carryover. Was your charitable donation deduction limited for 2014 or prior years? You may have a carryover that you can use if you’re going to itemize on your 2015 tax return.

Tip: Take this carryover into consideration when planning your 2015 donations so you don’t lose the benefit of older unused amounts. Charitable contribution carryforwards have a five-year life.

Net operating loss carryover. If your business had a loss in 2014, you had to make an election to carry the entire loss forward to 2015. Otherwise, the general rule of carrying the net operating loss back two years applies, with the remainder carried forward 20 years.

Give us a call to schedule a tax planning appointment. We’re ready to help you get the most benefit from these and other carryovers, such as investment interest, tax credits, and passive activity losses.

Take time for tax planning

Take time to review your 2015 tax situation while there are still a few months to make adjustments. Can you benefit from bunching your itemized deductions? Will increasing your retirement plan contributions cut your tax bill? An investment in a tax review could make a significant difference in your final tax bill for the year.

Managing AGI could protect tax breaks

How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions. Knowing how close you are to the “edge” can help preserve tax breaks for 2015.

Many phase-outs are based on modified adjusted gross income, or MAGI. MAGI is the adjusted gross income shown on your tax return as “modified” by adding back certain deductions. The “add-backs” vary with specific phase-outs. That means you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying rules differ – including the MAGI threshold.

Here are some common federal tax benefits with MAGI phase-outs.

*   Education credits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 if you’re married filing jointly ($80,000 if you’re single). The credit disappears completely when your MAGI is greater than $180,000 for joint returns ($90,000 if your filing status is single).

For 2015, the Lifetime Learning Credit begins to phase out at $110,000 when you’re married filing a joint return and $55,000 when you’re single. Once your MAGI reaches $130,000 (married) or $65,000 (single), the credit is no longer available.

*  Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer’s plan and your MAGI exceeds $98,000 ($61,000 when you’re single).

While Roth IRA contributions are not tax-deductible, the amount you can contribute for 2015 begins to phase out when your MAGI reaches $183,000 and you’re married filing jointly ($116,000 if you’re single).

In addition, the federal “saver’s” credit for contributing to retirement plans phases out when your 2015 MAGI is more than $61,000 and your filing status is married filing jointly ($30,500 for singles).

*   Other phase-outs. The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your MAGI over the base amount of $32,000 when you’re married filing jointly. The base amount is $25,000 when you’re single.

Phase-outs also reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.

Contact our office for guidance in managing your income for maximum tax breaks.

Miscellaneous deductions could cut your tax bill

If you itemize deductions, you may be able to deduct some of the miscellaneous expenses you pay during the year. These miscellaneous deductions can be taken only if their total exceeds two percent of your adjusted gross income. Deductions include such expenses as the following:

*    Unreimbursed employee expenses.

*    Job hunting expenses (in your same line of work).

*    Certain work clothes and uniforms.

*    Tools needed for your job.

*    Union or professional dues.

*    Work-related travel and transportation (not commuting costs).

IRS publishes tips for amending returns

If you discover an omission or error made on your already filed tax return, you may need to file an amended return. Here are some IRS tips for amending returns.

  1. Use Form 1040X. You must file a paper amended return; this form can’t be e-filed.
  2. File an amended return to correct errors or change your original filing.
  3. Don’t file an amended return to correct math errors or to attach forms you forgot to attach originally. The IRS will mail a request for the forms and will automatically correct math errors.
  4. You generally have three years from the original filing date to file an amended return.
  5. If you’re filing for multiple years, you must file a separate Form 1040X for each year.
  6. If you’re due a refund from your original filing, wait until you’ve received the original refund before you file Form 1040X for an additional refund.
  7. If you owe more tax with Form 1040X, pay it as soon as possible to avoid added interest and penalties.
  8. You can track the status of your filed Form 1040X with the IRS’s “Where’s My Amended Return?” tool at www.irs.gov

Back to school? Check this tax credit

If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don’t owe any taxes.

Are itemized deductions worth the effort?

Knowing the difference between the standard and itemized deduction might save you a lot of time and trouble, and some taxes to boot.

The IRS gives taxpayers a choice of using the standard deduction or an itemized list of qualified deductions to calculate their taxable income. For taxpayers with large mortgages or charitable donations, it’s a no-brainer; they come out ahead by itemizing. For others, it boils down to a question of whether it’s worth the trouble of sifting through all their records and receipts.

To put things in perspective, the standard deduction for 2015 will be $6,300 for single filers, $12,600 for those married filing jointly. If you or your spouse are over 65 or blind, the standard deduction is a little higher. So if your total mortgage interest, property taxes, and charitable donations are normally less than those figures, you will probably be better off with the standard deduction.

But that’s not the end of it. If you have a large out-of-pocket medical bill in one year, it might tip the scale toward itemizing. Only qualified medical expenses exceeding 10% of your adjusted gross income (AGI) are deductible, but the threshold is 7.5% of AGI through 2016 if you are age 65 or older. After 2016, it’s 10% for everyone. If you think you will qualify for a medical expense deduction this year, consider adding other deductions such as extra charitable donations before December 31 to maximize your tax savings.

Take note that if someone else can claim you as a dependent, you cannot take the full standard deduction, so you might be better off itemizing. Another wrinkle: Itemized deductions are limited when income reaches $258,250 for single filers, $309,900 for married filing jointly.

Keeping track of potential itemized tax deductions may be unnecessary in your situation, but before you make that call speak with a tax professional.

Accurate inventory numbers are crucial for your business

For many companies, inventory is a significant dollar amount on the company’s financial statements. So it’s crucial that recorded inventory balances reflect actual values. When such accounts aren’t properly stated, the cost of goods sold and current ratios – numbers that often matter to decision makers – may be skewed. If banks discover that your company’s inventory accounts are overstated, they may not extend credit. If, when necessary, inventories aren’t “written down” (their values lowered in the accounting records), fraud may go undetected or the company’s net profits may appear unrealistically rosy.

Inventories decline in value for a variety of reasons. You might be in the business of selling electronic equipment to retail customers. Over time, yesterday’s “latest and greatest” gadgets become today’s ho-hum commodities. Such goods still have value, but they can’t be sold at last year’s prices. Your inventory is experiencing “obsolescence.”

Inventory “shrinkage” is another term that’s often used to describe declining inventory values. Let’s say you run a construction materials company. Unbeknownst to you, a dishonest supervisor is skimming goods from your shelves. A periodic inventory count that’s compared to your company’s general ledger might show that inventory is declining faster than it’s being sold. As a result, you may decide to investigate and to reduce inventory values in your accounting records.

Other examples of shrinkage might include a clothing store that loses inventory due to shoplifting or a warehouse facility that’s hit by a storm. In both cases, inventories may need to be written down in the company books to more accurately reflect actual values. Under another scenario, a shady supplier might bill your company for goods that aren’t actually shipped or received. If invoices are recorded in your accounting records at full cost, your inventory may end up being overstated.

For some companies, several sources feed into inventory values. A manufacturing concern, for example, might add all the expenses needed to prepare goods for sale – including factory overhead, shipping fees, and raw material costs – into inventory accounts. When those supporting costs fluctuate, inventory accounts are often affected.

To ensure that your inventory numbers remain accurate, it’s a good idea to conduct regular physical counts and routinely analyze the accounts for shrinkage, obsolescence, and other evidence of diminishing value.

Midyear tax planning tip

Take time this summer to examine your investment portfolio for potential tax savings, such as selling stocks that are worth less than you paid to offset your capital gains. You might also donate appreciated stock that you have held for more than one year to charity and avoid capital gains altogether – plus getting a deduction for the stock’s fair market value if you itemize. Another step to consider: Buy investments that pay tax-free income, such as municipal bonds, if you’re going to be subject to the new 3.8% tax on unearned income.

Postpone taxes with this strategy

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can’t swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don’t qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a delayed exchange, the replacement property must be specifically identified in writing within 45 days and must be received within 180 days (or by your tax return due date, if earlier), after sale of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There’s no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.