Mid-Year Tax Planning – 2014

Tax Season 2014 has come and gone and now it’s time to think about tax planning for tax year 2014. Items which could impact your 2014 taxes include certain life events and expired tax provisions.

Certain Life Events

Have you recently had a birth, adoption or death in your family? Have you gotten married, divorced, retired, or changed jobs this year? If so, you and your tax professional need to discuss the potential impact on your 2014 taxes. For example:

1) For Qualifying Children under the age of 17, a tax credit up to $1,000 per qualifying child may be allowed (which may be refundable.)
2) If you have retired (or are planning on retiring), you need to analyze how your change in income resulting from receiving IRA or pension distributions, and/or Social Security benefits will impact your tax liability.
3) A divorce or marriage could impact your tax situation in multiple ways (for example, alimony paid or received, deductions for mortgage interest and real estate taxes on your home, QDROs (qualified domestic relations orders) and potential changes in the standard deduction and personal exemptions allowed.)

Expiring Tax Provisions
Given the current political climate, it is not known if or when an agreement on extending the Expiring Tax Provisions (“extenders”) may be reached. These extenders have made tax planning a challenge for both taxpayers and tax professionals. Therefore, if any of these provisions impact you, it is important that you contact your tax professional or personally monitor legislative activity so that you are aware of the possible tax consequences:

1) Sales Tax Deduction: Prior to 01/01/2014, taxpayers may have been eligible to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. This included the sales tax paid on the purchase of a vehicle. This deduction is no longer available to individuals.
2)Mortgage Insurance Premiums: Prior to 01/01/2014, taxpayers may have been eligible to deduct the amounts paid for qualified mortgage insurance premiums along with their mortgage interest (subject to adjusted gross income limitations). Effective 01/01/2014, no deduction is allowed for these premiums paid or accrued after this date.
3)Tax-free Distributions from Individual Retirement Plans for Charitable Purposes: Prior to 01/01/2014, taxpayers over 70 ½ may have been eligible to exclude from their gross income distributions up to $100,000 from their IRA to a qualified charitable organization. This permitted taxpayers to satisfy their Required Minimum Distribution (RMD) and not include the amount in their income. As this reduced their Adjusted Gross Income (AGI), which favorably impacted the taxable amount of Social Security benefits received, this was a large tax advantage for taxpayers. This special distribution provision is not available for distributions after 2013.
4) Qualified Principal Residence Debt Exclusion: Prior to 01/01/2014, the discharge of principal residence debt (qualified mortgage on a taxpayer’s main home incurred to buy, build or substantially improve his or her main home) was generally excluded from gross income. As many taxpayers are still experiencing financial difficulties resulting in foreclosures, short sales or debt forgiveness on their primary residence, the tax ramifications for 2014 will have major tax consequences.

Other Steps to Consider Before the End of the Year

You should thoroughly review your situation before year-end to determine the best tax strategies for 2014 and the impact on 2015 as well. Accelerating income/deferring deductions into 2014 or deferring income/accelerating deductions to 2015 are just a couple of approaches that could benefit you.

If you have any foreign assets, be aware that there are reporting and filing requirements for those assets. Noncompliance carries stiff penalties.

Be a “Professional” Writer — All Year Long

By Gary A. Hensley, MBA, EA

If you are new to the writing life, or even a veteran, you are in the business of writing if your intent is to write long-term and make a living (or at least a profit) from your work. You are self-employed (you work for yourself) and that means you are a sole proprietor for tax purposes. You will need to file a Schedule C with your federal Form 1040 to report your writing income and expenses.picture004

If you visit www.irs.gov and type Schedule C in the search box, you will see some of the expenses allowed. Part of your business responsibility includes keeping accurate business records, during the calendar year (not after), to track your income and expenses. You will be on the “cash basis” of accounting, i.e. you report your writing income when it has actually been received and your expenses when they have been paid.

Most of you hire someone to “prepare” your annual tax return. Many of you keep your participation to an absolute minimum. This is akin to turning in a partially-completed manuscript, replete with grammatical errors, to an editor, and then expecting him or her to return a bestseller to you.

You need to accurately summarize your income and expense records before you meet with your preparer (or do the return yourself). One example: make sure you have added up all your business miles for 2014 and multiplied them by 56 cents per mile. The law requires that you maintain a “contemporaneous” record of your business mileage during the year. Get a $5 day-planner at Walmart and put it in your glove compartment. Use it each time you head out on business. Jotting down the beginning and ending odometer readings, and the business purpose, makes you bullet-proof if you are audited. You will be amazed at the total amount of business miles (and very happy with the large expense deduction). Proper recordkeeping in other areas will yield the same results.

In addition to proper recordkeeping, you need to take additional steps to document (or support) your professional (business) status as a writer. A diary of your various business activities will be very helpful. A manuscript submission/rejection/resubmission record will show continuous activity. Attendance at a writer’s club and writing seminars will indicate you are trying to improve your skills. A separate bank account/debit card for the business is critical.

It’s not unusual for any new business to sustain losses during the early years; however, to have those losses allowed, you must be able to demonstrate that you are “active” in the business.

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This article originally appeared in the January 2014 newsletter The Write Life.

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