TAX PLANNING FOR INDIVIDUALS

Barbara M. Coats, CPA

November 13, 2014

The Big Picture: Sources of Tax Revenue

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The Big Picture: Income Distribution

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The Big Picture: Who Pays What

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The Big Picture: Average Tax Rates

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The Big Picture: Largest Tax Preferences

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Health Insurance

• For employees, tax-free income for health insurance premiums paid by employer

• For business owners and sole proprietors, health insurance premiums are tax deductible

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Health Insurance

• Health savings accounts (HSA)

– For those covered by a high deductible health plan

– Tax deductible contributions for 2014

• $3,300 for self only coverage

• $6,550 for family coverage

– Distributions are tax-free if reimburse qualified medical expenses

– Allowing funds to accumulate produces an “extra IRA”

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Health Insurance

• Flexible spending arrangement (FSA)

– Can be funded by employer or employee

– Maximum 2014 contribution is $2,500

– Use it or lose it

• Grace period of up to 2½ months after year-end

• Or $500 carryover to following year

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Health Insurance

• Individual Health Care Coverage Mandate

– Effective for 2014 tax returns

– Must maintain minimum essential coverage or pay penalty

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Qualified Retirement Plans

• Company provided Section 401(k) plans and 403(b) plans

• Maximum contribution:

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2014 2015

Annual contributions $17,500 $18,000

Over age 50 catch up $ 5,500 $ 6,000

Qualified Retirement Plans

• Pre-tax or Roth contributions – which is better?

– Will you be in higher tax bracket a retirement?

– Can you afford reduction in take home pay today?

– Required minimum distributions begin at 70½ unless Roth 401(k) is rolled into a Roth IRA

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401(k): Pre-tax versus Roth Contributions

• A 45-year old earns $75,000 annually. He will contribute 8% of annual salary to his 401(k). He will retire at age 65 and retirement will last 20 years.

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Pre-Tax 401(k)

Roth 401(k)

Difference

Take home pay pre-retirement $1,035,120 $1,005,120 $(30,000)

Nest egg at age 65 $294,510 $294,510 -

Post-tax retirement income $502,560 $591,120 $ 88,560

Net Roth advantage $ 58,560

Individual Retirement Accounts (IRA)

• Three types of IRA contributions: pre-tax, Roth, after-tax

• Back door Roth IRA conversion

– Can be used if income is too high to make Roth IRA contribution

– Make non-deductible IRA contribution

– Immediately convert the non-deductible IRA to a Roth IRA

– Conversion causes no tax if the non-deductible IRA is the only IRA that a person owns

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2014 2015

Annual contributions $5,500 $5,500

Over age 50 catch up $1,000 $1,000

Roth IRA Conversion

• Lowers overall taxable income over long-term

• Tax-free compounding

• No required minimum distributions at age 70½

• Tax-free withdrawals for beneficiaries

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Business Retirement Plans

• SEP-IRA – $57,500 ($58,500 over age 50)

• SIMPLE IRA - $12,000 ($14,500 over age 50) plus employer match

• Individual 401(k) - $52,000 ($57,500 over age 50)

• Cash balance plans

• Defined benefit plans

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Prioritizing Tax Efficiency of Trust Investments

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Tax-Exempt (Muni Bonds)I/EE Savings BondsTax-Managed Stock FundsMost Index Stock FundsLarge Growth Stock FundsInternational StocksLarge Value StocksSmall Cap StocksSmall Value StocksStock Trading AccountsBalanced FundsREITsTIPSTaxable BondsHigh-Yield Bonds

Most Tax Efficient

Least Tax Efficient

• Active, aggressive capital loss harvesting makes sense for a trust

• $3,000 of trust’s capital loss carryforwards can reduce other income

• Capital loss carryforwards last for life of trust

• Excess capital losses carry to beneficiary in year of trust termination

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Capital Loss Harvesting

• Municipal bonds

• Section 529 plans

• Health savings accounts

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Tax-Free Investments

WB Individual Clients Who Paid 3.8% NIIT

• Over three quarters of the individuals owed NIIT because of their net investment income

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What Was Tax Based On?

76%

24%

NII

AGI

• The higher the income, the more likely that the tax was based on net investment income

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WB Individual Clients Who Paid 3.8% NIITDid Answer Change Based on Income?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Up to $500,000 $500,000 to $1million

Over $1 million

NII

AGI

Planning for the Business Owner

• Choose type of entity which is most tax efficient– Limited liability companies– S Corporations

• Avoid use of Schedule C (sole proprietors) andSchedule F (farming)

• Buy fixed assets when depreciation is “on sale”

• Minimize depreciation periods, including cost segregation

• Watch for retroactive reinstatement of expired bonus depreciation

• Material participant versus passive investor22

Passive Activities

• Seven tests which a taxpayer uses to determine materialparticipation:

1. Participation of more than 500 hours in a year

2. Taxpayer’s participation is substantially all the participation in the activity

3. Participation of more than 100 hours in a year and this participation is not less than the participation of any other individual

4. Participation for more than 100 hours in a year and participation in all activities qualifying for this test exceeds 500 hours a year

5. Material participation for any 5 of the last 10 years

6. If the business is a professional service business, material participation for any 3 prior years

7. Meeting a facts and circumstances test

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Section 469 Rules

Planning for Charitable Giving

• Donation of long-term appreciated stock

• Charitable remainder trusts, especially with net income make up

• Setting up private foundation vs. donor advised fund

• Obtain receipts

• Properly value donations of household items

– Salvation Army Donation Value Guide: http://satruck.org/donation-value-guide

– Goodwill Industries: http://www.goodwill.org/donate-and-shop/donate-stuff/

• Watch for retroactive reinstatement of donation of $100,000 from IRA to charity directly (for those 70½ and older)

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Common Federal Tax Credits

• Health insurance for small employers

• Foreign tax credit

• Research credit

• Education credits

• Child credits

• Alternate fuel vehicle credits

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Common Georgia Tax Credits

• Education expense credits (make reservation nowfor 2015)

• Film credits

• Low income housing credits

• Retraining credit

• Angel investor credit

• Alternate fuel vehicle credits

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Staying Out of Trouble

• File and pay on time

• Big audit issues: meals & entertainment, passive activities, Schedules C & F

• File foreign bank account report forms. Seek help if you are delinquent.

• Multi-state taxpayers should file in all states

• Keep proof of filing – certified mail

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Barbara M. Coats, CPAPrincipal

Windham Brannon3630 Peachtree RoadSuite 600Atlanta, Georgia 30326Main: 404.898.2000Direct: 678.510.2724Fax: 404.898.2010Email: bcoats@windhambrannon.com

Contact Information

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