Tax Planning & Trimming Your Tax Bill

When it comes to making moves to slash your federal income-tax bill, it pays to start early. You have a limited opportunity to come up with planning strategies that may help reduce the taxes you’ll owe for 2014, so don’t miss out.

Can You Say Loss?

While you haven’t actually lost anything until you sell an underperforming investment, now may be a good time to review your portfolio for potential candidates. An investment that has lost value since you acquired it and consistently underperformed its benchmark may no longer belong in your portfolio. If the investment shows no sign of improving, selling it before year-end and taking a capital loss may be your best move. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses can be carried over for deduction in future years, subject to the same limitations.

A Good Time for Gains

Favorable tax rates may make taking profits on appreciated stock you’ve held longer than one year advantageous. Long-term capital gains from the sale of stocks and other securities are currently taxed at a maximum rate of 15% for most taxpayers, 0% for taxpayers in brackets below 25%, and 20% for taxpayers in the top regular tax bracket (39.6%). Current capital losses or carryover losses from a prior year can offset gains from the sale.

Don’t make taxes your only reason for selling an investment. Consider the impact the sale will have on your overall portfolio before you make a decision.

Year End Tax PlanningSave More, Pay Less

Increasing your pretax contribution to an employer-sponsored retirement plan before the end of the year may be another strategy to consider. Since you don’t pay current taxes on your contributions, deferring a greater amount of your pay can lower your tax bill. If you’ve reached age 50 and already contributed the maximum annual amount through salary deferrals, your plan may allow you to make catch-up contributions.

In addition, the contributions you make to a traditional individual retirement account by April 15, 2015, may be deductible on your 2014 tax return. The 2014 contribution limit is $5,500 ($6,500 if you’re age 50 or older). Your tax advisor can review the deduction requirements with you.

 

Donating to Charity

You have until year-end to make donations to your favorite organizations and claim an itemized deduction for charitable contributions. (Make sure the organizations qualify to receive deductible contributions.) By donating with a credit card or with a check mailed by December 31, you’ll be able to take the deduction on your 2014 return even though you won’t receive your credit card bill or have your check processed until January 2015. You’ll need to have specific proof of your gifts. Deduction limits apply.

Bunching Expenses

Accelerating or delaying expenses is a strategy that may help you exceed the floor amounts for certain deductions. For 2014, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income, or AGI (7.5% of AGI for individuals age 65 or older). Scheduling and paying out-of-pocket costs before year-end for medical appointments, elective surgery, dental work, or eye exams that you were planning for early 2015 may help you exceed the floor. The deduction for unreimbursed employee business and miscellaneous expenses is limited to the amount that exceeds 2% of AGI.

Not every strategy mentioned will be appropriate for your personal situation. Your tax advisor can help you determine those that can make a difference.

179D and Its Benefits for the Construction Industry

179d

You probably have encountered section 179 and the accelerated depreciation benefits it provides. However, we have found the familiarity with section 179D to be greatly limited. This is discouraging considering the substantial benefits it can provide to those in the construction industry. Let’s take a brief look at 179D and highlight its advantages.

What is Section 179D?
It is a provision for energy efficient commercial buildings built or upgraded with energy efficient improvements after 12/31/2005. The maximum deduction available is $1.80 per square foot and acts as an accelerated depreciation deduction. The calculation for the deduction (up to the maximum) is based upon the interior lighting, HVAC, building envelope costs and efficiencies. This is certainly a nice benefit for building owners. However, the greatest tax savings are obtained by those in the construction industry, including engineers and architects.

Permanent tax benefit
As I eluded to earlier, the 179D deduction is inherently an acceleration of depreciation. Nevertheless, this deduction becomes more than an accelerated deduction for those in the construction industry. Why? The IRS realizes that governmental entities cannot benefit from this deduction due to their tax-exempt status and allows them to allocate (essentially transfer) the deduction to the responsible party for designing the property. This means that this deduction is a permanent benefit (once transferred) that would not otherwise be attainable by the designer. It is a method that reduces the tax burden on each governmental project and increases the after tax earnings for those firms that choose to take advantage of this opportunity.

Please contact your William Vaughan Company representative for further information and for guidance on the facilitation of this deduction.

By: Nate Bernath, CPA

Retirement Plan Fiduciary Responsibilities

Do you manage your company’s retirement plan in your day-to-day activities? Managing a retirement plan such as controlling the plan assets or using discretion in managing the plan makes you the plan fiduciary. According to the IRS, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. Fiduciary is not just a title, but the very functions performed for the plan.

Important fiduciary responsibilities include:
– Acting solely in the interest of the participants and their beneficiaries
– Acting exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
– Following the plan documents (unless inconsistent with ERISA)
– Diversifying plan investments
– Carrying out your duties as a fiduciary prudently, with care, and diligence

fiduciaryWho sets the standards for fiduciaries of retirement plans?

The Employee Retirement Income Security Act, also known as ERISA, set standards of conduct for those who manage employee benefit plans and its assets. It is important for the fiduciary to follow through with their responsibilities because they act on behalf of the participants in the retirement plan and their beneficiaries. According to the Department of Labor (DOL), the significance of being a fiduciary is acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them.

Carrying out duties prudently is one of a fiduciary’s central responsibilities under ERISA. In other words, a fiduciary should have knowledge and expertise in a variety of functions necessary to operate the plan. It is recommended to consult experts in accounting and investments to assist in carrying out your fiduciary responsibilities the best that you can.

It goes without saying, the responsibility of being a fiduciary should not be taken lightly. It is a big responsibility and often times businesses hire someone to act as their fiduciary to handle the responsibilities set forth above. Even if you hire a financial institution or retirement plan professional to manage your plan, you retain some fiduciary responsibility for the decision to select and keep the service provider. You should document your selection process and monitor the services provided to determine if you need to make a change.

By: Aubrey Forche, Staff Accountant

Your Fantasy Football Team’s Biggest Fan Is…

The fantasy football season is in full swing as we are approaching the middle of the NFL season. For some, the season is going great and you are eagerly awaiting the playoffs, while others are all but eliminated from contention after drafting a team full of underachieving duds. For those of you lucky enough to be in the thick of the playoff hunt, remember that Uncle Sam is cheering you on. That is, he wants a cut of your winnings.

fantasy-football-winningsSome of you may be thinking, “why would the government care about fantasy football? It’s just a fun hobby and gives me something to talk about at the water cooler.” The truth is, fantasy football is a major industry and the IRS is very aware of such notion. According to an article from the Fantasy Sports Trade Association’s website, nearly 37 million people play fantasy football. According to the article, fantasy football players will spend an average of $111 per year. At 37 million players, that’s a staggering total of $4.1 billion each year. You better believe that Uncle Sam wants in on the winnings!

If your fantasy football skills earn you a payout of $600 or more, you will likely receive a 1099-MISC in the mail come January, which reports your winnings to the IRS. The amount of your winnings that are taxable can be reduced by entry fees, transaction fees, research materials (such as magazines) and losses from other leagues where you weren’t quite as lucky. So be sure to keep records of all your expenditures to support the information reported on your 1040.

Once you come to the net of all your winnings less all expenses, this amount will be reported as “other income” on line 21 of your 1040. Since the amount reported will not match the 1099-MISC you received, you will need to attach a statement to the return reconciling the 1099-MISC to the amount reported. Note that if you were in several fantasy football leagues where you lost money and one where you won, you will not be able claim a loss on your return and will just report income of $0.

So I hope everyone’s season is going well, but remember, Uncle Sam has a rooting interest in your team as well.

By: Mark Sawyer, CPA

Are You an Audit Target?

Each year there are individuals who are targeted for IRS audits based on minor decisions they may have made during the year. One goal during tax season, besides being on time, should be to completely avoid the IRS in an ethical manner. There are multiple ways that individuals may intentionally or unintentionally raise red flags, which makes them susceptible to an IRS audit.
While there are a number actions that may call for an IRS audit, here are some of the more common red flags:

auditCharitable donations. Who would have thought being generous could land you in hot water? The truth is, usually, it won’t. However, people who are audited in regards to charitable donations are the ones who over exaggerate the value of their donations, generally when dealing with non-cash items. Avoid the headache of dealing with the IRS and be realistic when it comes to pricing your donations. Also, remember to keep all of your charity receipts just to be safe.

Reported income. Failing to report income seems like an obvious red flag to most people, but you would be surprised to find out how many people honestly forget to report certain income. If you are an individual with multiple brokerage statements, it may be a good idea to create a checklist to keep on hand, ensuring each form of income is reported. Being organized will keep you safe and less stressed come tax time.

Being a millionaire. While the red flags associated with charitable donations and reporting income are ones that you may be able to avoid, there is one red flag that may be waving regardless of your action. Once you become a millionaire, your chance of being audited increases exponentially. While the current audit rate is at 1% on average, the rate climbs all the way up to 9% if you make $1 million. Just to give you an idea of how much the risk of being audited grows in relation to what you earn, people who bring in more than $10 million have a 27% percent chance of an audit. Let’s hope these individuals are reporting all of their income as well, because this percent does not have a limit!

Overall, there are some red flags that individuals will be able to avoid and some that should be expected. The goal should be to eliminate as many red flags as possible while being remaining. Make sure you keep donation receipts, record realistic values on donations and report all of your income. Hopefully, you will be on your way to a headache free tax season!

By: Jason Wenner, Staff Accountant

October 15 Deadline Upon Us

October 15, the deadline to file extended individual tax returns is fast approaching. This is a great time for a reminder that the extension applies to the filing due date, and it is not an extension of the due date to pay. Penalty and interest are still charged to an account if the resulting tax liability is not fully paid on April 15.

tax deadline

The terms “penalty and interest” sound gruesome enough on their own. Now throw in the fact that they’re showing up on an IRS notice, and it might be enough to make some taxpayers’ bones quiver.

But what if you don’t have the cash to pay the entire bill at once? The IRS will allow individuals to set up an installment plan, but that cost you too. Penalty and interest are still due, and on top of that there is a one time set up fee that can cost over $100. As scary as a large tax liability can be, surely one wouldn’t want to make it worse by adding to it. Well don’t fret, we have a viable solution: pay it down with a credit card and owe the bank instead of the IRS.

By: Anthony Mifsud, Staff Accountant

Special Per Diem Rates for 2014-2015 Travel Expenses Issued

The IRS has released its annual update of special per diem rates for use in substantiating certain business expenses taxpayers incur when traveling away from home in 2014 and 2015. IRS Notice 2014-57 includes rates for incidental-expenses-only deduction, special meals and incidental expenses in the transportation industry, and high-low substantiation method.

Transporation_Airplane6Rates for special meals and incidental expenses in the transportation industry are $59 for travel anywhere in the continental United States and $65 for travel outside of the continental United States. Regardless of whether you are traveling inside or outside of the continental United States, the per diem rate for incidental expense-only deduction will be $5 per day. The per diem rates for the high-low substantiation method have increased from $251 to $259 for travel to any high-cost locality and $172 for travel to any other locality in the continental United States. Out of the $259 high rate and $172 low rate, the amounts treated as paid for meals is $65 for travel to any high-cost locality and $52 to any other locality within the continental United States. A list of high-cost localities with a per diem rate of $216 can also be found in Notice 2014-57.

These new per diem rates went into effect on October 1, 2014 and are intended for any employee traveling away from home on or after that date.

By: Rachel Mossing, Accountant