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Special Issues Requiring Action in 2014

A. GET THE INFORMATION YOU NEED TO MAKE A DECISION ON HEALTH INSURANCE COVERAGE FOR 2015.

The Affordable Care Act levies penalties on individuals who do not have health insurance coverage. The penalty
for 2015 is 2% of your Modified Adjusted Gross Income or $325/adult plus $162.50/child, whichever is greater.

Action:
Determine whether your existing coverage is renewable for 2015.

Check for changes from 2014:
• Premium
• Deductible
• Health Savings Account options
• Coinsurance percentages
• In network
• Out of network

Go to healthcare.gov and get the same information for 2015 policies.
Talk to your healthcare providers and find out if they are in-network for specific policies.

Check your history of medical expenses.
An important factor in your policy choices is your expected annual medical expenses. If the amount
is low, you should consider a high deductible paired with a HSA contribution. If your medical
expenses are high and recurring, you would lean towards a low deductible policy.

Estimate your 2015 medical expenses, and classify for each policy.
• In network
• Out of network

If you are not covered under a group plan, we have algorithms that compute your share of medical expenses
under Affordable Care Act policies at varying levels of medical expenses.

If you have questions about the performance of policy choices, contact us and we can go through various
scenarios.

Tax and Financial ISSUES 2

B. IF YOUR CURRENT HEALTHCARE COVERAGE HAS BEEN CANCELLED, APPLY FOR A NEW POLICY BY 12/15/2014.

You cannot activate a policy at any time. You must get this done during the open enrollment period. Here are the
application submission dates and the dates of effective coverage:

Submission Date Date of Coverage
To 12/15/2014 1/1/2015
12/16/2014 – 1/15/2015 2/1/2015
1/16/2015 – 2/15/2015 3/1/2015

Open enrollment ends on 2/15/2015. The next open enrollment period is for 2016 coverage and is from
11/5/2015 through 2/15/2016. Individual states may set their own enrollment periods, but absent state action, the
federal guidelines are in effect by default.

The only exception to open enrollment requirements are for “qualifying events.”
• Loss of essential coverage (such as from loss of employment)
• Change in family structure (marriage, divorce, etc.)
• A move to a new location
• When a child covered under a family plan turns 26

If you don’t like the pricing in the public risk pools, it’s likely that you will like the cost of short-term policies
even less.

C. NEW IRA ROLLOVER RULES ARE EFFECTIVE FOR 2015

The IRS apparently got tired of taxpayers doing serial rollovers to get use of IRA cash while not declaring
distributions as taxable income. The strategy was to take a distribution and roll it over back into the account
within 60 days. Multiple rollovers for a single account were not allowed, but the rule was applied on an account
by account basis, allowing for multiple rollovers through different accounts. That game is over. Taxpayers are
allowed only one rollover in a calendar year that is not a fiduciary to fiduciary transfer. The rule applies to all
of a taxpayer’s IRAs IN THE AGGREGATE, and not on an account by account basis. The new rule applies
starting in 2015. We have always considered this rollover strategy to not be a particularly good idea. It always
leaves the account owner scrambling for cash.

Action:
Taxpayers who have used the IRA rollover strategy should line up long-term financing outside of IRA
accounts.

D. HEALTH INSURANCE DOCUMENTATION
We have known since its enactment that the Affordable Care Act imposed increased tax reporting requirements
on individuals, employers, and insurance companies. Individuals who don’t have healthcare coverage may
be subject to a penalty. For 2014 it is the greater of 1% of Modified Adjusted Gross Income or $95/adult plus
$47.50/child.

Tax and Financial ISSUES 3

The ACA contemplates that reporting of healthcare coverage will become a regular part of individual income
tax returns, as if there wasn’t enough in the returns already. To ease the burden on individuals, insurance
companies and employers will be expected to report coverage with monthly coverage details on new forms
1095-B and 1095-C.

This reporting doesn’t begin until 2015, which presents a problem for 2014 returns. This leaves reporting up to
individual taxpayers.

Action:
• When gathering your 2014 tax documents, collect the following information.
• Policy information
• Who was covered
• The time period of coverage
• There may be multiple policies, and coverage may not be uniform throughout the year.

E. CHARITABLE CONTRIBUTIONS FROM IRA.

In 2013 individuals were allowed to make charitable contributions from IRA accounts to meet minimum distribution requirements.

There were some restrictions:
• Available if you were 70½.
• Made to a public charity
• Maximum $100,000

This law expired after 2013 but on 12/16/2014 was extended for 2014.

Action:
If you have not yet made minimum distributions for 2014, consider making charitable contributions from IRA
accounts.

F. YEAR-END TAX SELLING

There is a graduated capital gains tax rate. Gains are taxed at:

• 0% if in the 10% or 15% federal brackets,
• 20% if in the highest federal bracket, and
• 15% for brackets in between

A 3.8% surtax on investment income is added on gains that are part of Adjusted Gross Income in excess of
$200,000 for a single filer, and $250,000 for joint filers. Add state income taxes, and the tax on capital gains can
exceed 30%.

A situation you want to avoid is paying tax on capital gains in 2014, but having non-deductible losses in 2015
because losses exceed gains. Taking capital losses to offset capital gains can also avoid the surtax on investment
income.

Tax and Financial ISSUES 4

Action:
• Review portfolios before year-end for tax selling opportunities.
• Look into spreading gains over two years to avoid the maximum 20% rate or 3.8% surtax.
• Take long-term gains if you are in the 0% or 15% tax bracket.

2014 Year End Tax Planning: Routine Follow-ups

1. REVIEW YOUR 2014 TAX ESTIMATES.

Update what 2014 will look like, and do the following:
• Estimate your marginal tax rates (income tax rate on the next dollar of income).
• Determine whether your wage or self-employment income will be above the
• FICA limit ($117,000 for 2014).
• Determine whether the Alternative Minimum Tax will apply.

2. DEVELOP STRATEGIES FOR TAKING 2014 DEDUCTIONS.

• Know where additional deductions will produce little or no tax benefit.
• If your childcare expenses are already above the tax credit or salary reduction limits.
• If your rental losses are already blocked by the passive loss rules.
If your losses or deductions will throw you into a 0%, 10%, or 15% tax bracket.
• If you won’t have enough deductions to itemize and instead will use the standard deduction (Single = $6,200; Married Filing Jointly = $12,400).

If you don’t have more medical deductions than 10% of Adjusted Gross Income, or miscellaneous itemized deductions greater than 2% of Adjusted Gross Income.

If any of these situations exist, it may be preferable to delay taking the deduction until 2015.

Tax and Financial ISSUES 5

3. LOOK FOR SITUATIONS WHERE TAKING INCOME IN 2014 WILL RESULT IN NO ADDITIONAL TAX BEING DUE.
Realizing capital gains where you will have excess (non-deductible) capital losses.
Realizing passive income where you have blocked passive losses.
Realizing investment income where you have blocked investment interest deductions.
Where you are in a zero or low (10% or 15%) income tax bracket.
Making a Roth IRA conversion.

4. MAKE SURE THAT YOU ARE MAKING MAXIMUM USE OF THE FOLLOWING TAX BENEFITS:

• $3,000/year capital loss deduction allowance.
• $25,000 rental loss allowance for owners with active participation in the ownership and management
• of rental real estate. (Warning: This benefit is phased out as Adjusted Gross Income increases from
$100,000 to $150,000.)
$5,000 per year dependent care exclusion or the $3,000 per individual childcare expenses qualifying
for the child care tax credit (maximum $6,000).

Deductible IRA contributions (Maximum $5,500 per individual). Individuals over age 50 are able
to make an additional “catch-up” contribution of $1,000. Non-working spouses may have deductible
IRA’s available if AGI tests are met. Note that deduction phase-out ranges are being increased annually
for individuals who have pension coverage. The AGI phase-out point for individuals with pension
coverage is $60,000 for single filers and $96,000 for joint filers with pension coverage. The phase-out
point for spouses without pension coverage starts at $181,000 of AGI when the other spouse has pension
coverage.
The Section 179 expensing allowance for personal property used in a trade or business. The
maximum deduction is $25,000 and the phase-out-threshold is $200,000 of asset additions. Off-the-shelf
software also qualifies for this allowance.

The optional standard mileage reimbursement rate for 2014 is 56 cents per mile.

5. INDIVIDUALS SHOULD MAKE SURE THAT TAX DEPOSITS ARE ADEQUATE.

To avoid underpayment penalties, your total withholding plus estimated tax deposits must exceed the
lesser of: (a) 2013’s tax or (b) 90% of your eventual 2014 tax.

Don’t forget to review estimated taxes for your children, unless they are under 19 (or under 24 if they
are full-time students) and you intend to include their income on your return. (This inclusion is only
allowed where the child has only interest and dividend income, and in total it is less than $10,000.)

Tax and Financial ISSUES 6

If your Adjusted Gross Income for the year is above $150,000, you will avoid underpayment
penalties if you deposit 110% of 2013’s tax. Taxpayers with incomes up to $150,000 can avoid
penalties by depositing 100% of the prior year’s tax as noted above.

6. REVIEW YOUR TAX BASIS IN PARTNERSHIPS AND S-CORPORATIONS.

Losses from S-corporations can be non-deductible if a shareholder does not have tax basis in either
the stock or debt of the company. Partnership losses can be limited if losses allocated exceed the
taxpayer’s basis in the partnership.

Partners and shareholders of these entities that are projected to have pass-through losses should
review their basis in the investment to make sure that the desired amount of loss will, in fact, be
deductible. Making additional investments before year-end to increase basis may be necessary to
make this happen.

7. PAY ATTENTION TO FINANCIAL HOUSEKEEPING.
• If you are married to a foreign national, make sure your spouse has an ITIN (Individual Tax Identification Number). E-filing is not allowed without one.
• Apply for Social Security numbers for dependents.
• Change Social Security name records for name changes due to marriage or divorce. (Note: Names used on tax returns must agree exactly to the spelling used by the Social Security Administration, including the use of abbreviations and initials.)
• Obtain documentation for charitable contributions. Gifts of $250 or more must be substantiated by a written acknowledgment from the donee organization.
• Obtain appraisals for non-cash contributions exceeding $5,000.
• Get auto usage records compiled. Businesses should make sure that the personal use value of
company autos is included in the employee’s W-2.
• Make sure that documentation for entertainment expenses is adequate to withstand an IRS audit.
• Do not dispose of the year’s appointment book if you intend to rely on it to support business deductions.
• Get taxpayer ID numbers for 1099 and W-2 recipients (including daycare providers) by having them
complete Form W-9.
• Document participation in business activities if you feel that this may be an issue in applying the
passive loss rules. The general cutoff point for material participation is 500 hours per year. The cutoff
for participation as a Qualified Real Estate Professional is 750 hours.

Tax and Financial ISSUES 7

Update your tax basis records for investments, especially for mutual funds with dividend
reinvestment. Also update basis records for improvements done to real estate.

If you have received any gifts of investment property during the year, ask the donor for the
carryover basis information.

Get business activities segregated into separate bank accounts for 2015.

If your deductions will change radically in 2015, be sure to adjust your withholding accordingly
using Form W-4.

Shareholders who have advanced money to their incorporated businesses should evidence the
transaction with a note and should charge an adequate rate of interest.

The value of health insurance paid on behalf of 2%+ S corporation shareholders should be included in

W-2 totals as wages.

Clean out the basement!!!! Financial records that relate to tax years more than three years prior can generally be disposed. (The big exception relates to the cost of assets. Keep asset basis records for as long as you own the property).

8. REVIEW 2015 BENEFIT PLAN OPTIONS WITH YOUR EMPLOYER.

• 401(k) plan contribution rate and investment choices. (Don’t forget to elect the bonus contributions if you’re 50 or older.)
• Non-qualified deferred compensation plan elections.
• Dependent care salary reductions.
• Compensation paid in the form of mass transit passes.
• Medical reimbursement plan salary reductions.
• Health insurance deductible options
• Health savings account contributions
• Flex spending account contributions

Having health insurance coverage with a high deductible policy entitles you to make contributions to a Health
Savings Account (HSA). Minimum qualifying policy deductibles are $1,300 for single coverage or $2,600
for family coverage. The maximum HSA contribution is $3,350 for single coverage (or $6,650 for family
coverage). Bonus contributions of $1,000 will be allowed for those individuals age 55 or more. Individuals
eligible for Medicare cannot make HSA contributions.

Tax and Financial ISSUES 8
The maximum annual contribution limit for a flex spending account is $2,550. Participants can carry over up
to $500 in unspent contributions if the plan has not adopted the 2½ month grace period rule. (This allows 2½
months after year-end to spend unused funds.) The $500 carryover will not reduce the current year’s FSA
contribution. Caution: Taking advantage of the carryover rule will prevent HSA contributions.
Action:
If you plan on making HSA contributions for 2015, clear out the flex spending account before year-end.

9. DISCUSS CHANGES TO EXPENSE REIMBURSEMENT ARRANGEMENTS WITH YOUR EMPLOYER BEFORE YEAR-END.
Expense allowance arrangements where actual business expenses are not reported to the employer
are not considered to be qualified expense reimbursement arrangements. Instances where the employee
documents expenses to the employer, but is not required to return excess reimbursements are also not
qualified reimbursement arrangements. All of these expenses are taken as itemized deductions subject to
a 2% of Adjusted Gross Income floor before they become deductible.
Taxpayers should discuss changing to qualified reimbursement arrangements.

10. ZERO OUT PERSONAL SERVICE CORPORATION INCOME WITH EXPENSE PAYMENTS AND BONUSES AT YEAR
END.
When taxable income is retained in a Personal Service Corporation (PSC), it is subject to a 35%
income tax. Corporations that have not elected S status must zero out income to avoid this tax.

11. RESTRUCTURE YOUR DEBTS WHERE POSSIBLE TO ENSURE DEDUCTIBILITY AND REDUCE FINANCIAL RISK.
Replace consumer debt with either home equity debt or business debt. Replace passive activity debt
with home equity debt if passive activity losses are limited.
Lock in fixed rates.

12. S-CORPORATION OWNER/EMPLOYEES SHOULD REVIEW HOW THEIR COMPENSATION IS SPLIT BETWEEN
SALARY AND DIVIDENDS.
S-Corporations can avoid some payroll taxes by paying out income to shareholder employees in
the form of dividends instead of salary. However, the formalities of setting salary levels and declaring
dividends should be strictly observed to avoid potential reclassification by the IRS.
Tax and Financial ISSUES 9

13. MAKE SURE THAT ALL INVESTMENT ACCOUNTS HAVE A PROPER SOCIAL SECURITY NUMBER AND ARE NOT
SUBJECT TO BACKUP WITHHOLDING.
The backup withholding rate is 28%. The existence of backup withholding can cause the filing of a
child’s individual return, instead of simply having the parents include the income on their tax return.

14. C-CORPORATIONS THAT PLAN TO RETAIN EARNINGS SHOULD MAKE ESTIMATED TAX DEPOSITS EVEN IF NO
TAX WAS INCURRED IN 2013.
Underpayment penalties are usually avoided if a taxpayer at least matches the prior year’s tax with
estimated tax payments. This penalty exception does not apply if a corporation has no tax liability in the
prior year.

15. IF YOU MAINTAIN AN IRREVOCABLE LIFE INSURANCE TRUST, MAKE SURE THAT CRUMMEY POWER
DOCUMENTATION IS KEPT IN YOUR FILE AND IS UP TO DATE.
In the absence of this documentation, the IRS can apply the transfer of funds to the trust against your
unified estate and gift tax credit.