Tax Strategies

Hundreds of thousands of Americans are well into the annual tax frenzy, though the deadline is a month away. There are some changes in tax law for 2014 and 2015 that you need to consider as you prepare a return.

Health Insurance

You may be subject to a penalty if you have not conformed to the mandates imposed by the Affordable Health Care Act. In 2014, the penalty is 1 percent of your household income or $95 per person if you have not obtained health insurance as required by the act. The penalty will rise to 2 percent of income or $325 per person in 2015. Get health insurance quickly to avoid this penalty.

Contributions

The limit an employee can contribute to a 401(k) will increase to $18,000, up $500 from last year’s cap. You needed to contact your payroll department at the first of this year to take advantage of the higher allowable. The “catch-up” allowance for those over 50 also has been increase, allowing for an additional $6,000 in contributions, $500 more than was allowed a year ago. The flexible spending cap for qualified health expenditures now is $2,500, $50 increase over the previous year.

Standard Deductions

Standard deductions also have risen, to $6,300 for individuals and $12,600 for married taxpayers filing jointly. Those figures are up $100 and $200 respectively. The standard deduction is important especially if you cannot itemize.

Changes In Tax Rates

For the tax year beginning in January, income tax thresholds have again been adjusted for inflation. The highest tax rate of 39.6 percent will apply now to single filers who earn over $413,200 and to married couples whose earnings are $464,k850 or above. The increase is about 1.6 percent over tax year 2014.

IRA Rollovers

IRA rollovers starting in 2015 are limited to a single event in a 12-month period. But you can still make as many “trustee to trustee” transfers as you like, moving your money from one provider to another. The new IRA rule is aimed at preventing the practice of withdrawing all the funds and then re-depositing them in a new account, a tactic some were using to create, in effect, a short-term, interest-free loan. Limit all rollovers to direct transfers in 2015 if you plan on moving money more than once.

Alternative Minimum Tax

The Alternative Minimum Tax exemption for 2015 is increased by 1.5 percent from 2014. Caps now are $53,600 for individuals or $83,400 for joint filers.

The segue from holidays to tax time is fast. If you are self-employed or if you freelance to supplement your income, you can make the move smooth by being prepared in advance to take advantage of the tax breaks offered to those in this category.

If you work at home, the government might subsidize what are considered personal expenses. If you regularly use part of your home or apartment for business matters, part of your utility and insurance costs may be deductible. You can write off part of the rent or the depreciation if you own your own home.

To help those who might have failed to claim this deductible because of the scary bookkeeping, the IRS has simplified the process. You may deduct $5 for every square foot of space that qualifies. On a 3,000-square-foot home, for instance, the deduction is $1,500.

Health insurance premiums and expenses also are eligible for deduction, but you must itemize. And the deduction is only to the extent that your medical expenses exceed 10 percent of your adjusted gross income (7.5 percent for those age 65 and older.)

If you are still running your business after you become eligible for Medicare, you can deduct the premiums for Medicare Part B and Part D as well as the cost of supplemental (medigap) policies. You don’t have to itemize to claim these deductions and don’t have to factor in the 7.5 percent of AGI tests that apply to itemized medical expenses for those 65 and older.

Employees can’t deduct the 7.6 percent of pay that goes into Social Security and Medicare. But if you are self-employed and have to pay the full 15.3 percent tax yourself, you may write off half of what you pay. The deduction is on the Form1040, so you needn’t itemize.

When you work for yourself, options for tax-sheltered retirement plans are available to you. You may choose to contribute pre-tax money to a Simplified Employee Pension (SEP) or a solo 401(k), either one of which has a higher annual limit than regular individual retirement accounts. You may opt for a regular IRA account. Each of the plans has its own set of tax requirements that you must be aware of.

Buying equipment for your business also provides a tax benefit. You may depreciate the cost over the number of years the IRS has established as the “life” of the particular item. A computer, for instance, has a life of five years, so the tax break can be broken down into that time period. But it isn’t as simple as deducting 20 percent for each of five years. The schedule calls for 20 percent the first year, 32 percent in the second, 19.2 percent in the third, 11.52 percent in year five and 5.76 percent in year six.

Or you may choose the Section 179 deduction that lets you deduct 100 percent of the purchase in one year. Many small business owners find this the least irksome choice. For the 2014 return, up to $500,000 in equipment is eligible for the immediate write-off.

Being aware of these deductions for your personal business could save you money when you prepare your 2014 return.

The annual tax frenzy is months away, but there are things you can do in the interim to prepare for tax season, including possible ways to cut your bill.

The obvious place to begin is with a recap of last year’s return. After analyzing the figures, begin to determine where you might make changes for next year. If you expect to make more money this year, for instance, start now to put more into a 401(k) account, contribute to a charity to increase your deduction, or buy tax-deductible items, such as business equipment, before the end of December.

Look back on recent events. If you had a major life change, it is likely to alter your tax status (think marriage or the acquisition of a small business.) You may be wise to consider some professional advice before the deadline looms. Many CPAs find themselves with more time on their hands after the Oct. 15 deadline for this year’s quarterly tax business. Seek help in analyzing your situation.

Experts say too many small business owners wait too long to get advice. Don’t try to find a professional tax advisor after the first of the year. They advise that when your income tops $75,000 annually, you’re ready for a tax expert in your particular field.

In an article by Teresa Mears, the following steps are suggested:

If you pay estimated quarterly tax, be sure you are current with payments to avoid possible penalties if your estimates are short. The sooner you send the money, the smaller the penalty will be.

Decide before the fact who is going to claim children as deductions if you and an ex-spouse have shared custody. Or if you share responsibility for the support of another relative, decide in advance who can claim the benefit. Consider the Earned Income Credit to determine what makes the best sense for your situation.

If you did not purchase health insurance this year, as required, you could face a penalty. See if you meet the criteria for any of several tax exemptions and file for a number, which you can obtain from the Health Insurance Marketplace.

At the same time, check the Affordable Care Act to see if you are eligible for a subsidy. If you received too much subsidy this year, you may have to pay it back. On the other hand, if your income did not reach expectations, you may receive a subsidy through your tax return. But the time to make changes with the Health Insurance Marketplace is now.

Spend the extra money in your flexible spending account if it exceeds $500. You can carry that amount into 2015, but you should not leave an excess in your account. Re-examine your company’s plan. Evaluate this year’s expenses and compare with what you expect in the coming year and consider adjusting your withholding if necessary.

Some taxpayers may choose to accelerate or reduce income to create the best tax stance. Prepaying mortgage and real estate taxes and undertaking optional business expenses before this year is out rather than waiting for next year may make sense for you.

If you sold stocks at a profit, you can offset the tax expense by selling other stocks at a loss.

Increasing contributions to your 401(k) or IRA if you haven’t reach the maximum will improve your tax picture. Donating cash or goods to charitable causes is a nice way to raise your deductions. You need to provide a written proof of donations worth more than $250 and an appraisal for anything over $5,000.

When you are thinking taxes, don’t forget to consider state and local tax levies. States sometimes change their tax formulas and you don’t want to be caught unawares.

Don’t be lax with your business. Treat it as such and don’t ignore quarterly tax payments. If you have been accustomed to doing your own taxes via a software application, it may be time to consult with an accountant to avoid surprises.