9385_the-individual-investors-guide-to-personal-tax-planning-2014

22 Pages·2014·1.62 MB·English

AAII Tax Guide
The Individual Investor’s Guide to
Personal Tax Planning 2014
By AAII Staff
Article Highlights
• Covers information on 2014 and 2015 taxes, including rates, exemptions and deductions.
• New rules for IRA rollovers and money market funds are explained.
• Infl ation adjustments were made to several, but not all, line items for 2015.
We start this year’s tax guide
extenders. More than 50 tax breaks for
with some good news: You may
individuals and businesses expired at the
have a smaller federal tax bill in end of 2013 and were never renewed. They
2015. include the deduction for state and local
The Internal Revenue Service (IRS) sales taxes, tax-free distributions from an
adjusted several line items to account for individual retirement account to a char-
inf ation. This indexing increases the dollar ity, the mortgage insurance deduction,
amounts def ning each tax bracket and the dollar amounts and parity for employer-provided mass transit and parking
for various exemptions and deductions. The net result is that benef ts. There is scuttlebutt about a compromise being
less of your income may be taxed. Plus, if you are just above reached to renew at least some of these breaks during the
the breakpoint for a tax bracket this year, the adjustments lame duck session of Congress. If the extenders actually are
could potentially put you into a lower tax bracket in 2015. renewed, and it’s not certain that they will be, we’ll post an
The amount of any federal tax savings will vary by tax- update on AAII.com.
payer. Some of you may actually pay more, particularly if Some of the changes in the tax code occurred outside of
your income is higher in 2015 or if there are certain exemp- the legislative branch. The IRS published new rules regard-
tions or deductions that you no longer qualify for. A new ing the disbursement of pretax and aftertax contributions to
penalty for not having health insurance is now in effect as def ned-contribution retirement plans (e.g., 401(k) plans). A
well. Still, many taxpayers will get a savings next year. Wolt- tax court ruling led to a new rule limiting IRS rollovers to
ers Kluwer, CCH estimates that a married couple with total one per year. The implementation of f oating net asset values
taxable income of $100,000 will pay $125.50 less in income for money market funds prompted a proposed rule change
taxes in 2015 than they will on the same income in 2014, sparing individuals from incurring the wash-sale rule. We’ll
assuming they f le a joint return. An unmarried person with cover all of these changes in this guide.
income of $50,000 will pay $62.50 less in 2015 than he or
she will in 2014. Keep in mind that these are just estimates.
A special note of thanks goes out to Mark Luscombe,
The numbers also exclude the impact of state and local taxes.
a principal federal tax analyst for tax content and software
Most of the inf ation adjustments for 2015 are included in
provider Wolters Kluwer, CCH (CCHGroup.com) and
this guide. In a welcome change, the Internal Revenue Service
John Hewitt, the founder and CEO of tax preparation
published much of the index adjustments before we went
provider Liberty Tax Service (libertytax.com), for answer-
to press. This has recently not been the case because of the
ing detailed questions about the current and prospective
f scal cliff situation in 2012 and the government shutdown
rules. Sources of information used for this year’s guide
in 2013. There were a few line items yet to be adjusted for
include CCH, “J.K. Lasser’s Your Income Tax 2015”
2015, such as the mileage deductions, and we’ll update them
(John Wiley & Sons, 2014), the Internal Revenue Service
on AAII.com after the information becomes available.
and the Social Security Administration.
We’re also waiting to hear about the f nal fate of tax
December 2014 7
Regardless of what does or does not
Table 1. An Overview of Tax Changes in the Coming Years happen on the legislative front, one
thing will be constant: You will still
2014 2015 2016
have to pay taxes. Furthermore, even a
Long-Term Capital Gains Rate
simplifed tax code is still likely to be too
Tax Bracket Equals 39.6%* 20% 20% 20%
complex; hence the need for tax guides.
Tax Brackets 25%–35%* 15% 15% 15%
As has been the case in years past, our
Tax Bracket 15% or Below 0% 0% 0%
tax guide provides an overview of the
tax rates and deductions likely to impact
Qualifed Dividends Rate
the majority of AAII members. Since
Tax Bracket Equals 39.6%* 20% 20% 20%
there are many details, loopholes and
Tax Brackets 25%–35%* 15% 15% 15%
pitfalls within the tax code, it is impos-
Tax Bracket 15% or Below 0% 0% 0%
sible for this guide to provide enough
details to cover specifc tax situations.
Marginal Income Tax Rates
If you have questions, consult a tax
Top Bracket 39.6% 39.6% 39.6%
professional. It is your tax return, and
Sixth Bracket 35% 35% 35%
the IRS will hold you responsible for
Fifth Bracket 33% 33% 33%
any errors made on it.
Fourth Bracket 28% 28% 28%
Third Bracket 25% 25% 25%
Estimate Your Taxes
Second Bracket 15% 15% 15%
on AAII.com
First Bracket 10% 10% 10%
We are continuing to give you the
Child Tax Credit $1,000 $1,000 $1,000
ability to estimate your 2014 and 2015
tax liabilities on AAII.com. Our Tax
Marriage Penalty Relief
Forecasting Worksheet allows you to
Standard Deduction (% of 200% 200% 200%
enter your data on our website. The
S.D. for singles)
fllable PDF document will calculate
15% Tax Bracket (% of bracket 200% 200% 200%
the results.
for singles)
Once you are fnished, you can print
a copy for your records. (Be sure to print
Personal Exemption $305,050 $309,900 $309,900**
the document if you want to preserve
Phase-outs
your work, since the document cannot
be saved to AAII.com. See the inside
Limitation on Itemized $305,050 $309,900 $309,900**
front cover of this issue, opposite the
Deductions
Table of Contents, for more details.)
AMT Exemption
What’s New?
Single $52,800 $53,600 $53,600**
Married Filing Joint $82,100 $83,400 $83,400**
Most individuals will continue to
Head of Household $52,800 $53,600 $53,600**
fall into the long-standing tax brackets
of 10%, 15%, 25%, 28%, 33% and
Estate Tax
35%. High-income earners will pay a
Exemption $5.34 million $5.43 million $5.43 million**
39.6% marginal tax rate on income. The
Maximum Rate 40% 40% 40%
dollar amounts defning each brackets
have been revised upward to account
*3.8% net investment income tax (NII) surtax applies when AGI is above $250,000/$200,000.
for infation.
**Subject to change based on infation.
Social Security is taxed at 6.2% for
employees and 12.4% for those working
This year, we’ve also added a new and during retirement. in self-employed positions on the frst
section discussing the tax impact of There is some speculation that prog- $117,000 of wages. In 2015, this limit
investing for and in retirement (see page ress could be made on comprehensive will rise to $118,500.
16). This section is intended to add some tax reform in 2015. It’s a diffcult task The alternative minimum tax
clarity to the rules. It also lists milestone complicated by politics, ideological dif- (AMT) exemption is $82,100 for mar-
birthdays to be aware of both before ferences and special interest infuences. ried couples fling jointly and $52,800
8 AAII Journal
AAII Tax Guide
for single flers in 2014. In 2015, the taxed at 15% if incurred for securities or $95 per adult ($47.50 per child)
exemption will rise to $83,400 and held within a taxable account. (There limited to a family maximum of $285.
$53,600, respectively. The exemptions is no capital gains tax or dividend taxes In 2015, the penalty will rise to 2%
are indexed to the rate of infation and for securities held within a retirement of household income above the gross
will continue be raised accordingly in the account, such as an IRA. See Robert income threshold for fling a tax return
future barring any new legislation. This Carlson’s article, “Do’s and Don’ts of or $325 per adult ($162.50 per child)
automatic increase is important because IRA Investing,” in the March 2010 AAII limited to a family maximum of $975.
previously the AMT exemption was not Journal for investments that can cause The penalty will rise to 2.5% of income
indexed to infation. New legislation an unexpected tax problem; the article or $695 per person in 2016 and will be
had to be passed to prevent the AMT is available at AAII.com.) Collectibles, indexed to infation afterward. Visit
from ensnaring an ever-larger number which include gold coins and bars, are www.irs.gov/aca for more information.
of taxpayers. taxed at a maximum 28% rate. Short- The mandate is on top of the ad-
The personal exemption phases out term capital gains are taxed as ordinary ditional Medicare tax and the NII tax.
at income levels of $305,050 for married income. If you are in the 10% or 15% The 0.9% additional Medicare tax ap-
couples fling jointly and $254,200 for tax bracket, long-term capital gains and plies to wages, compensation and self-
single flers for 2014. The phase-outs qualifed dividends are not taxed. employment income above $250,000
will increase to $309,900 and $258,250, A 20% tax applies to long-term for married persons fling jointly and
respectively, in 2015. The total amount capital gains and dividends realized in $200,000 for single persons. The previ-
of exemptions that can be claimed by taxable accounts by married couples fl- ously mentioned surtax on net invest-
a taxpayer is reduced by 2% for each ing jointly with incomes above $457,600 ment income applies to married couples
$2,500 or portion thereof by which and single flers with incomes above fling jointly and single flers with net
adjusted gross income exceeds the $406,750 in 2014. The same higher tax investment income or modifed adjusted
threshold level. Married couples fling rate will apply to married couples fling gross income exceeding $250,000 and
separate returns will see their exemp- jointly with incomes above $464,850 $200,000, respectively.
tions reduced by 2% for each $1,250 and single flers with incomes above More information about these taxes
of adjusted gross income. $413,200 in 2015. Married couples fling can be found in the box on page 10.
An adjustment for the so-called joint returns with net investment income
“marriage penalty” puts the standard or modifed adjusted gross incomes Infation Adjustments Coming
deduction for married couples fling above $250,000 and single flers with net in 2015
jointly at double the standard deduction investment income or modifed adjusted Though several deductions, ex-
for those fling single. Married couples gross incomes above $200,000 also must emptions and limits were either kept
fling jointly can claim a standard deduc- pay the additional 3.8% net investment unchanged or were only increased by a
tion of $12,400 and single flers can claim income (NII) surtax on capital gains and modest amount because of the low levels
a standard deduction of $6,200 on their dividends. Collectibles, which include of infation in 2014, many of them will
2014 tax returns. In 2015, those amounts gold coins and bars, are taxed at a 28% be increased in 2015.
are projected to increase to $12,600 and rate, but are eligible for the 3.8% sur- For example, the maximum contri-
$6,300, respectively. charge as well. The $250,000/$200,000 bution a worker can make to a 401(k)
The phase-out for the $1,000 maxi- thresholds are not indexed to infation plan was held steady at $17,500 in 2014,
mum child tax credit is not indexed to and will remain the same in 2015. but will increase to $18,000 in 2015.
infation. This means the $1,000 credit There are some exceptions, however,
is phased out for married couples fling New Medical Insurance Mandate such as the deductible IRA contribu-
jointly with modifed adjusted gross in- The individual shared responsibility tion. This will stay unchanged at $5,500
come (MAGI) above $110,000 in 2014 provision of the Affordable Care Act ($6,500 for those ages 50 or older) in
and will remain at this level without went into effect on January 1, 2014. 2015.
legislative action. If the child tax credit It requires adults and children to have Many, but not all, 2015 fgures had
exceeds the tax liability, the difference minimum essential health coverage. been announced by press time; we have
will be paid to the taxpayer, subject to Both Medicare Part A and Medicare noted in the tables the numbers that
certain requirements. See IRS Publica- Part C (Medicare Advantage) qualify have not yet been updated by the IRS.
tion 972 for more information. as minimum essential health coverage.
Most taxpayers will not see a change Taxpayers who did not have qualify- Estate Tax
in long-term capital gains and dividend ing coverage and did not qualify for The estate tax rate will remain at
tax rates, barring a drop into the lowest an exemption in 2014 will be assessed 40% in 2014 and 2015. The estate tax
marginal tax bracket or a rise into the a penalty of either the greater of 1% exemption is indexed to infation, which
top marginal tax bracket. Long-term of household income above the gross means a large dollar amount of a person’s
capital gains and qualifed dividends are income threshold for fling a tax return estate can be shielded from the tax rate.
December 2014 9
Health Care Reform’s Impact on Taxes
The tax impact of the Affordable Care Act includes rents and royalties, capital gains and passive income
surcharges, higher limits on medical expense deductions, from partnerships. Capital gains from the sale of one’s
changes to fexible savings account contributions and primary residence are subject to the tax to the extent
carryovers, and a penalty for not complying with the the income exceeds the applicable home sale exclusion
medical insurance mandate. ($500,000 for joint flers and $250,000 for single flers).
A 0.9% additional Medicare tax applies to wages, Excluded are tax-exempt interest (e.g., municipal bond
compensation and self-employment income above interest payments), distributions from individual retire-
$250,000 for married persons fling jointly and qualify- ment accounts (IRAs) and distributions from qualifed
ing widows(ers), $200,000 for single persons and head retirement plans (e.g., 401(k) plans). The IRS has answers
of households and $125,000 for those who are married to common NII surtax questions at www.irs.gov/uac/
but fling separately. The tax applies to wages that are Newsroom/Net-Investment-Income-Tax-FAQs.
subject to the Medicare tax and does not depend on Uninsured medical expenses must exceed 10% of
adjusted gross income. Should the additional tax not be adjusted gross income before they can be claimed as a
withheld from wages (a situation that could occur for deduction. Individuals age 65 and older qualify for the
dual-income couples or individuals working more than lower 7.5% foor through 2016.
one job), the tax could be subject to a penalty if not paid Flexible savings arrangement contributions for 2014
with estimated taxes or through additional withholdings are limited to $2,500 annually. This limit is indexed to
(you can request that your employer increase the income infation and will rise to $2,550 in 2015. At the election
tax withholding on your W-4). More information about of their plan sponsors, employees can either carry over
the additional Medicare tax can be found on the IRS unused balances of $500 into the next plan year or take
website at www.irs.gov/Businesses/Small-Businesses- a grace period of up to two-and-half months.
&-Self-Employed/Questions-and-Answers-for-the- As of January 1, 2014, failure to maintain minimum
Additional-Medicare-Tax. essential health coverage will result in a penalty. The pen-
A 3.8% surtax on net investment income (NII) ap- alty is the greater of 1% of household income above the
plies to the lesser of net investment income or modifed gross income threshold for fling a tax return or $95 per
adjusted gross income exceeding $250,000 for married adult ($47.50 per child) limited to a family maximum of
persons fling jointly and qualifying widows(ers), $200,000 $285. In 2015, the penalty will rise to 2% of household
for single persons and head of households and $125,000 income above the gross income threshold for fling a
for those who are married but fling separately. (These tax return or $325 per adult ($162.50 per child) limited
thresholds are not indexed for infation.) Investment to family maximum of $975. The penalty will rise to
income subject to the tax includes, but is not limited 2.5% of income or $695 per person in 2016 and will be
to, taxable interest, dividends, non-qualifed annuities, indexed to infation afterward.
The exemption is $5.34 million in 2014 sale transaction and the value of the and options was originally intended to
and will be increased to $5.43 million assets at the time of inheritance. go in effect on January 1, 2013.
in 2015. This is a per-spouse exclusion The cost basis reporting require-
and it is portable, meaning if one spouse Change in Capital Gains Reporting ment is a change from previous years,
passes away, the surviving spouse can Brokers are now required to report when brokers only reported the pro-
claim the exclusion, resulting in a total the cost basis for options and bonds ceeds from a sale. This is the third part
effective exclusion of $10.68 million in bought and sold by their clients on or of a rule that started going into effect
2014 and $10.86 million in 2015. The after January 1, 2014. Pay attention to in 2011. Brokers and mutual fund
large fgures will prevent most families the date; if you bought an option or a companies must report the cost basis
from having to pay estate taxes. bond in 2013 or in a previous year, your for stocks purchased after January 1,
The step-up basis rule is a perma- broker is not required to report the cost 2011, and mutual fund, exchange-traded
nent part of tax code, barring any change basis. Certain debt instruments, particu- fund (ETF) and dividend reinvestment
made by future legislation. Under the larly those that are more complex than program (DRP) shares purchased after
step-up basis rules, if an inherited asset traditional bonds, will not be covered January 1, 2012.
is sold, the capital gain resulting from by the cost basis reporting rule until If you sold a capital asset in 2014,
the sale is calculated as the difference January 1, 2016. As we noted in last you will need to fll out Form 8949. See
between the proceeds at the time of the year’s guide, the rule covering bonds the special write-up in the “Cost Basis”
10 AAII Journal
AAII Tax Guide
box on page 12 for details on the rules. remains in effect
For a complete tax guide to the buying and selling
until December
of your personal investments, go to our Personal Invest-
Medical Expenses 31, 2014, allows
ments 2014 Tax Guide in the online version of this article.
The higher threshold for deduct- one rollover per
ing medical expenses remains in effect. account per year.
Those under the age of 65 at the end of The new rule does not apply to trustee- marriage in a larger number of states
2014 can only deduct medical expenses to-trustee transfers, meaning you can has tax implications. Same-sex marriages
exceeding 10% of adjusted gross income move the actual account from broker receive treatment similar to common-
(AGI). Those age 65 or older at the to broker as many times as you would law marriages under the tax code if
end of 2014 will continue to be able to like. The key is that you do not move the couple was married in a jurisdic-
use the lower 7.5% foor for deducting funds from one IRA to another. The tion where such marriages are legally
medical expenses through 2016. new rule goes into effect on January recognized.
Medical insurance premiums for the 1, 2015, and applies to rollovers made Last year, in United States v. Wind-
self-employed are deductible and can be on or after this date. Rollovers made sor, the U.S. Supreme Court struck down
used to reduce adjusted gross income in 2014 are disregarded as long as the Section 3 of the Defense of Marriage
on Form 1040. 2015 distribution is from a different Act, which defned marriage as a union
Workers participating in fexible IRA that neither made nor received the between one man and one woman. In
savings accounts (FSA) can carry over 2014 distribution. response, the IRS clarifed and amplifed
up to $500 of unused amounts into Rollovers to or from a qualifed plan the revenue ruling that determined the
the next plan year if their plan spon- (e.g., a 401(k) plan) are excluded from tax status of couples living in a common-
sor allows them to. Plan sponsors have the new rule. Trustee-to-trustee transfers law marriage situation for federal income
the choice of either offering employees are also excluded. This means you can tax purposes. In doing so, the IRS said
the ability to carry over up to $500 or move your entire IRA account directly that for over 50 years, it has recognized
allowing employees a grace period of from one broker to another without marriages based on the laws of the states
up to two-and-half months. triggering the one-year waiting period as they were entered into.
long as the assets are directly transferred The last sentence is important. If a
Money Market Funds With to the new broker and not to you frst. couple enters into a same-sex marriage
Floating NAVs Roth IRA conversions are not subject in a state where it is legal to do so, the
A new rule from the Securities and to the one-year limitation and the IRS couple is considered married for federal
Exchange Commission (SEC) requires will disregard them in terms of apply- tax purposes, regardless of where they
some money market funds, particularly ing the one-rollover-per-year limitation currently reside. Common-law marriages
institutional prime money market funds to other rollovers. A rollover between are recognized if the two people entered
and tax-free institutional money market Roth IRAs would, however, trigger the into a common-law marriage in a state
funds, to use foating net asset values one-year waiting period for both Roth where the common law is recognized.
(NAVs). This means their NAVs are not IRAs and traditional IRAs. Couples in domestic partnerships,
pegged to $1 per share, but rather can The second rule change governs civil unions, or other similar formal
move above or below that benchmark. distributions composed of both pre- relationships recognized but not de-
The IRS responded to the SEC’s tax and aftertax contributions from nominated as marriage under state law
ruling by saying “No gain or loss is de- defined-contribution plans, such as are not considered to be married for
termined for any particular redemption 401(k), 403(b) or 457(b) plans. As long federal tax purposes. The IRS says this
of a taxpayer’s shares in a foating-NAV as directions are given to the plan admin- applies to both opposite-sex and same-
money market fund. Without a determi- istrator in advance of the distribution, sex relationships.
nation of loss, a particular redemption the pretax and aftertax contributions
does not implicate the wash-sale rules.” can be assigned to different accounts. Expired Tax Extenders
The wash-sale rules disallow a loss be- Previously, the pretax and aftertax distri- Several tax breaks for individuals
ing claimed for tax purposes when an butions were not allowed to be assigned expired at the end of 2013. These tax
investment is sold and a substantially to separate accounts. This rule can be breaks are no longer in existence and
identical investment is purchased within used as guidance for distributions taken cannot be claimed on 2014 or 2015
30 days of the sale. on or after September 18, 2014. See IRS taxes. They include, but are not limited
Notice 2014-54 for more information to: the deduction of the state and local
IRA Rollover Rules Altered and examples of various scenarios. sales taxes, IRA distributions to charity
The IRS made two changes to the and transit benefts. It is possible that
rules regarding IRA rollovers. The frst Same-Sex and Common-Law legislation renewing these tax breaks
limits aggregate IRA rollovers to one Marriage could be passed after we send this guide
per person per year. The old rule, which The legalization of same-sex to the printer.
December 2014 11
Cost Basis Reporting for Stocks, Bonds, Funds and Options
The cost basis and the proceeds from options and has performed, this treatment can result in a larger tax
bonds purchased after January 1, 2014, will be reported bill (the shares appreciated in value) or a bigger capital
by your broker. This date refects a one-year postpone- loss (the shares fell in value).
ment from the previous implementation date of January For mutual funds and DRP stocks, the adjusted basis
1, 2013. The cost basis for complex debt instruments, must be reported in accordance with the broker’s default
including infation-indexed debt instruments, convertible method—average cost basis—unless you specify other-
bonds and stripped bonds, is not required to be reported wise. As the name implies, the average purchase price
by brokers until January 1, 2016. The delay refects for your shares, regardless of when they are acquired, is
requests by brokers for more time to implement the used to determine the cost basis. You can specify FIFO
systems needed for handling the complexities of these instead of average cost basis. Another option is specifc
types of securities. identifcation. The specifc identifcation method allows
Investors have the option of notifying their broker you to choose the specifc shares that are sold. This
as to how market discounts or interest is treated. Brokers treatment can also result in a larger or a smaller tax bill,
will follow a default method of amortizing bond pre- depending on how the fund has performed relative to
miums if not otherwise notifed. The rules are complex the purchase price of the selected shares. You may be
and we suggest speaking with your brokerage frm about able to use other methods such as highest-in, frst-out
the application of the rules, as well as a tax professional (HIFO) or last-in, frst-out (LIFO). Contact your broker,
about the best tax treatment to use. fund family or DRP program to determine what their
The type of option owned alters how cost basis is default methodology is and what choices you have for
reported. Index options may be subject to different cost selecting methodologies.
basis reporting rules. Again, we suggest speaking with If you want your broker or fund family to use a
your broker if you have questions about how the cost specifc methodology other than their default method-
basis is reported. ology (e.g., FIFO for stocks or average cost for mutual
Brokers have previously been required to report cost funds), you must notify them. In order to do this, you
basis for stocks purchased after January 1, 2011, and for must provide written instructions to your broker or fund
mutual fund, exchange-traded fund (ETF) and dividend administrator detailing your intentions before the order
reinvestment plan (DRP) shares purchased after January is executed, not afterward.
1, 2012. Brokers are also required to state whether any Dustin Stamper at Grant Thorton’s National Tax
gain or loss on a sale is short term or long term. The Offce emphasized the importance of providing these
rules do not apply to securities and funds purchased instructions in writing. If you give your broker or fund
before the aforementioned dates. family specifc instructions and they report a different
A default accounting methodology known as frst-in, methodology to the IRS, the only way you can dispute
frst-out (FIFO) is used when the purchase of securi- what is on Form 1099-B is to provide a dated copy of
ties (other than a mutual fund or DRP shares) involves your instructions. Stamper said that investors will not be
more than one transaction. The FIFO method treats the able to retroactively determine which shares were sold;
frst shares purchased (“frst in”) as also being the frst they must provide written instructions at or before the
shares sold (“frst out”). Depending on how the stock time the shares are sold.
Tax Software, Books and Guides and information. Standard Deduction
For 2014, the standard deduction is
Although the tax rates, deductions Useful Tax Numbers $12,400 for married couples fling a joint
and exemptions for 2014 were covered return, $6,200 for those who are single
in the January 2013 tax legislation and Here is a list of the tax rates, de- or married fling separate returns and
many of the 2015 numbers were updated ductions, exemptions, credits and other $9,100 for heads of household.
by the IRS recently, if you use a software related items that may apply to your 2014 For 2015, the standard deduction
program (e.g., TurboTax), a book (e.g., and 2015 taxes. These numbers refect will be $12,600 for married couples fling
“J.K. Lasser’s Your Income Tax 2015”) the changes made by the American Tax- a joint return, $6,300 for those who are
or a related aid, check for updates before payer Relief Act of 2012 (ATRA) and single or those who are married fling
fling. Doing so will help to ensure that 2015 infation adjustments announced separate returns and $9,250 for heads
you are using the most up-to-date forms by the IRS. of household.
12 AAII Journal
AAII Tax Guide
Personal Exemptions
The 2014 personal exemption is How Much of Your
$3,950. The exemption can be claimed
for yourself, your spouse (if fling a joint Social Security is Taxed?
return) and any qualifying dependents.
The exemption will start to phase out Percent of
SS Benefts
at $305,050 for married couples fling
Combined Income* Taxed
jointly and $254,200 for single flers.
The personal exemption will rise Below $25,000 Single & Head of Household 0%
to $4,000 in 2015. The phase-out levels Below $32,000 Married Filing Jointly
will be raised to $309,900 for married $25,000 to $34,000 Single & Head of Household up to 50%
couples fling jointly and $258,250 for $32,000 to $44,000 Married Filing Jointly
single flers.
Above $34,000 Single & Head of Household up to 85%
Above $44,000 Married Filing Jointly of benefts + other income
Individual Retirement Accounts
and 401(k) Plans
*The Social Security Administration defnes combined income as: Your adjusted gross
The maximum allowed IRA con- income + nontaxable interest + ½ of your Social Security benefts.
tribution for 2014 is $5,500 ($6,500 for
any individual who is age 50 or older).
The contribution limits were unchanged Estate and Gift Tax Limits distribution requirement.
in 2014 and will remain unchanged in Tax laws passed in 2010 and 2013 According to the IRS, “Generally,
2015. The additional catch-up contribu- made the estate tax exemption both an RMD is calculated for each account
tion limit of $1,000 is not indexed to portable and indexed to infation. The by dividing the prior December 31st
infation and will also be unchanged exemption is $5.34 million in 2014. In balance of that IRA or retirement plan
next year. The contributions can be 2015, the exemption will rise to $5.43 account by a life expectancy factor that
fully deducted for modifed adjusted million. See the previous section about IRS publishes in tables in Publication
gross incomes (modifed AGIs) below the estate tax for information on calcu- 590, Individual Retirement Arrange-
$96,000 and $60,000 for married fling lating taxable gains from the sale of the ments (IRAs).”
joint and single returns, respectively. In inherited assets.
2015, the phase-outs for deducting IRA The annual gift tax exclusion is Child Tax Credit
contributions will rise to $98,000 and $14,000 in 2014 and $28,000 for con- In 2014 and 2015, the maximum
$61,000, respectively. senting couples. (You will need to fle child tax credit for dependent children
In 2014, the maximum annual Form 709.) The exclusions will stay younger than 17 is $1,000. The credit
contribution limit to a 401(k) plan or unchanged in 2015. was made permanent by the ATRA.
similar type of defned-contribution
plan is $17,500 ($23,000 if you are age Required Minimum Kiddie Tax
50 or over), unchanged from 2013. The Distributions (RMDs) In 2014, the “kiddie tax” applied to
maximum contribution will increase in Individuals age 70½ and older are children up to age 18 and could apply
2015 to $18,000 ($24,000 if you are age required to take a distribution from their to children up to age 23—depending
50 or over). retirement accounts by December 31, on how much earned income they have
In 2014, the maximum annual con- 2014. These accounts include 401(k) and whether or not they are full-time
tribution for SIMPLE plans is $12,000 plans, 403(b) plans, 457(b) plans, tradi- students.
(those age 50 or over can make a maxi- tional IRAs, SEP IRAs, SARSEP IRAs, Under the kiddie tax rules, children
mum catch-up contribution of $2,500); SIMPLE IRAs and Roth 401(k) plans. with investment income above a certain
in 2015, the maximum contribution will RMDs from defned-contribution plans, amount may have part or all of their
increase to $12,500. such as 401(k) plans, can be postponed investment income taxed at their parents’
beyond age 70½ if you are still working, income tax rate.
Qualifed Plan Contributions contributing to a defned-contribution The kiddie tax applies in both 2014
In 2014, the maximum annual con- plan and own less than 5% of the com- and 2015 if the child is age 17 or younger
tribution for qualifed plans, including pany. Roth IRA plans are exempt while by the end of the year. In 2014, the
SEP and Keogh plans, is $52,000 or 25% the owner is alive. kiddie tax will apply if the child’s total
of your compensation, whichever is less; If you turned 70½ in 2014, you have investment income exceeds $2,000. It
in 2015, the maximum contribution will until April 1, 2015, to take your frst will increase to $2,100 in 2015.
be $53,000 or 25% of your compensa- RMD. You will need to take a second In addition, the kiddie tax can ap-
tion, whichever is less. RMD during 2015 to satisfy that year’s ply to older children, depending on
December 2014 13
how much earned income they have deductions for those under the age of Education Savings
and whether or not they are full-time 65 in tax years 2014 and beyond. The The maximum Hope Scholarship
students. lower 7.5% foor will remain in effect Credit (the American Opportunity edu-
• Starting in the year that your child for those age 65 or older through the cation credit) of $2,500 per year for the
turns 18, the kiddie tax will apply if year 2016. frst four years of post-secondary edu-
your child’s earned income (includ- cation for tuition and related expenses
ing salaries and wages, commissions, Itemized Deduction Phase-Outs (including books) was extended through
professional fees and tips) does not The phase-out of itemized deduc- 2017 by the ATRA. This credit can be
exceed half of the child’s overall tions (the “Pease” limitation) for taxpay- claimed in both 2014 and 2015.
support. ers with adjusted gross income above The Lifetime Learning credit can
• Starting in the year your child turns a certain amount was reinstated by the be claimed for education expenses be-
19, the kiddie tax will apply if your ATRA. It applies to married fling jointly yond the fourth year of post-secondary
child is a full-time student. and single taxpayers with incomes of education and for non-degree courses
• The kiddie tax will stop applying in $305,050 and $254,200, respectively, or intended to improve job skills. The
the year your child turns 24. higher in 2014. For 2015, the phase-out maximum credit is $2,000 annually and
• The kiddie tax will also not apply if levels will rise to $309,900 and $258,250, is subject to income phase-outs.
your child is married fling jointly. respectively. You can make non-deductible con-
Planning Considerations: Married tributions to qualifed tuition plans, also
Charitable Donations taxpayers fling jointly will need to calcu- known as section 529 plans. (However,
Donations of clothing and other late whether taking the increased stan- the contributions may be deductible
personal items must be in “good condi- dard deduction or itemizing deductions from your state income tax, depending
tion” or better in order to be deducted. will generate the most tax savings overall. on where you live.) These accounts,
Form 8283 must be flled out if your total When doing so, make sure to consider offered by states or their designees, are
deduction for all noncash contributions whether state law restricts the ability to maintained solely for the qualifed higher
exceeds $500. itemize to only those who itemize for education expenses of a benefciary.
In addition, charitable contributions federal purposes. The higher deductions Distributions are tax-free, provided that
of cash (regardless of the amount) to may also require more couples to pay the distributions are used to pay quali-
any qualifed charity must be supported alternative minimum tax (AMT). fed expenses.
by a dated bank record (such as a can- The ATRA made the $2,000 per
celled check) or a dated receipt from Sales Tax Deduction beneficiary contribution limit to a
the charity that must include the name The provision allowing taxpayers Coverdell Education Savings Account
of the charity and the date and amount who itemize deductions the option of permanent. The contributions are not
of the contribution. choosing between a deduction of sales deductible, but they grow tax-free in the
The provision that allowed those taxes or income taxes when claiming a IRA. Coverdell accounts may be used to
age 70½ or older to distribute up to state and local tax deduction was NOT fund qualifed elementary, secondary and
$100,000 from their traditional indi- extended into 2014 as of press time. higher education expenses. However,
vidual retirement account (IRA) tax-free New legislation is required to reinstate it. the amount that can be contributed is
to qualifed charities expired in 2013. limited for higher-income taxpayers.
The provision was NOT renewed for Tax-Exempt Interest Reporting
2014 or beyond as of press time. New State and local governments are
Investment Strategies:
legislation is required for this provision required to report interest paid on
2015 and Beyond
to be reinstated. tax-exempt state and local bonds on
Form 1099-INT, Interest Income. This The inability of members of Con-
Medicare amount must be shown on your tax gress to fnd much common ground
Taxpayers who itemize deductions return and is for information only. on fscal issues leaves the future of the
can deduct (as a medical expense) the tax code in doubt. Though the ATRA
premiums they pay for Medicare Part B Health Savings Accounts provided clarity in terms of current
supplemental insurance and Medicare You may be able to take a deduc- legislation, any long-term agreement on
Part D prescription drug insurance. tion if you contributed to a Health the federal budget and debt reduction
Premiums for voluntary coverage under Savings Account (HSA). To qualify, you could include changes to the tax code.
Medicare Part A are only deductible by must be covered by a “high-deductible Though we cannot predict what
those over the age of 65 and not covered health plan.” the politicians in Washington will do,
by Social Security. More information on this can be or when they will do it, there are strate-
Medical expenses must exceed 10% found at AAII.com in the online version gies that make sense regardless of the
of adjusted gross income to qualify for of this article. legislative environment. Listed below are
14 AAII Journal
AAII Tax Guide
traditional tax planning strategies that $457,600 and single flers with income losses left over reduce short-term gains,
can help keep your tax bill down. It is above $406,750 in 2014, the long-term and vice versa. If you still have losses
important, however, to keep in mind that capital gains rate is 20%. In 2015, the remaining after offsetting capital gains,
your goals and risk tolerance, not just 20% long-term capital tax rate will you can reduce your “ordinary” income
the income tax impact of an investment, apply to married couples fling jointly by up to $3,000. Losses not used this
should drive your investment decisions. and single flers with incomes above year can be carried forward to future
$464,850 and $413,200, respectively. years until they are used up. For more
Consider Roth IRA Short-term capital gains, in contrast, information, see “Capital Pains: Rules
Conversion Opportunities are taxed at ordinary income tax rates for Capital Losses” by Julian Block in the
You have the option of converting and run as high as 39.6%. The 3.8% net September 2010 AAII Journal (available
all or part of your traditional IRA into investment income (NII) surtax, which at AAII.com).
a Roth IRA, regardless of your adjusted went into effect on January 1, 2013, When planning, make sure you don’t
gross income. Roth IRAs can provide applies to taxpayers with income above run afoul of the wash-sale rules. If you
certain advantages: The converted assets the $250,000/$200,000 thresholds. This sell an investment at a loss and then
can be withdrawn tax-free at any time, tax applies to both short- and long- acquire a substantially identical security
future earnings are also tax-free (with term capital gains, as well as taxable during the 30-day period before or 30-
some limitations) and Roth IRA owners interest, dividends, non-qualifed an- day period after the sale, the loss will
are not required to take any minimum nuities, rents and royalties, and passive be disallowed. If your loss is disallowed
distributions in retirement. The down- income from partnerships. The NII by the wash-sale rule, you can increase
side, however, is that the conversion surtax is not indexed to infation, and the cost basis of the new position of
amount is taxable in the year it occurs. the $250,000/$200,000 thresholds are the substantially identical security by
While the benefts of a Roth IRA effective for both 2014 and 2015. the amount of the disallowed loss. The
conversion could be considerable, Similar rules apply to qualifed divi- holding period for the new position is
taxpayers must carefully weigh the up- dends. For married couples fling jointly also adjusted to include the holding
front tax costs against the long-term with income above $457,600 and single period of the position sold at the disal-
tax advantages. For more on this, see flers with income above $406,750 in lowed loss. You cannot adjust the cost
“Retirement Plans: Evaluating the New 2014, dividends are taxed at 20%. In basis or holding period if you acquire
Roth IRA Conversion Opportunity” 2015, the 20% qualifed dividend tax rate the investment in an IRA or Roth IRA,
by Christine Fahlund in the November will apply to married couples fling jointly however. For information, see “Keeping
2009 AAII Journal and “New Rules for and single flers with incomes above Transactions Clean From the Wash-Sale
Converting to a Roth IRA” by William $464,850 and $413,200, respectively. Rules” on page 29 in this issue.
Reichenstein, Alicia Waltenberger and Though tax considerations should
Douglas Rothermich in the January 2010 never be the primary reason for selling Consider the Impact of Taxes on
AAII Journal (both available at AAII. a security, if you have large positions in Mutual Fund Investments
com). Though the articles discuss the either gifted or inherited stocks, or stocks Selecting tax-aware managers of
one-time 2010 option for delaying the received from a sale of a business, you mutual funds may be important to
taxes from the conversion, their sug- should consider whether it makes sense maximizing your aftertax rate of return
gestions regarding whether to convert to sell shares over a period of time to in your taxable investment portfolio.
or not continue to be applicable. You take advantage of the long-term capital You may choose when to sell spe-
may also want to consult a tax adviser. gains rates and use the proceeds from cifc shares of the fund and may, there-
You cannot convert required mini- selling the stock to diversify your portfo- fore, create long-term versus short-term
mum distributions (RMDs) from your lio. This is particularly the case if a large capital gains, as long as you notify the
traditional IRA for a particular year portion of your wealth is concentrated fund family or your broker in writing
(including the calendar year in which in just a few securities. with specifc instructions. But you don’t
you reach age 70½) to a Roth IRA. control the investments within the fund.
IRS publication 590 explains the rules Use Losses Carefully Should an equity manager fail to extend
for RMDs and Roth IRA conversions. While tax considerations should not the holding period on a stock, it could
drive your investment decision, you can cost you as much as 19.6% of your gain
Take Advantage of Lower take advantage of losses in holdings that (39.6% ordinary rate for short-term
Marginal Rates you would prefer to either sell or reduce capital gains versus the 20% long-term
Deferring income that is taxed at from an investment standpoint. capital gains rate).
higher ordinary tax rates makes sense. Capital losses frst reduce capital Some mutual fund dividends can
Most taxpayers will pay long-term capital gains: long-term losses reduce long-term be treated as qualifed dividends and
gain tax rates of 0% or 15%. For married gains frst, and short-term losses reduce eligible for the reduced tax rate, while
couples fling jointly with income above short-term gains frst. Any long-term others will not qualify. Dividends paid
December 2014 15
The Tax Impact of Investing for and in Retirement
Various parts of the tax code govern how much can to a Roth IRA in both 2014 and 2015. The maximum
be saved for retirement, when withdrawals can be made contribution is subject to income phase-outs starting
and how much has to be withdrawn. $181,000 for married couples fling jointly and $114,000
There are three big birthdays you should be aware of. for single flers in 2014. (The phase-outs will increase to
At age 50, the maximum amount allowed to be contrib- $183,000 and $116,000, respectively, in 2015.)
uted to retirement savings accounts increases (“catch-up Contributions to IRAs and Roth IRAs for the 2014
contributions”). At age 59½, you can take withdrawals tax year can be made as late as April 15, 2015. When
from all retirement accounts without incurring the 10% making a contribution for the previous calendar year,
early withdrawal penalty. Finally, once you reach age ensure your broker registers the deposit correctly.
70½, you are both no longer eligible to contribute to Withdrawals from retirement accounts are consid-
a traditional IRA and you must begin taking required ered to be taxable income unless taken from a Roth IRA,
minimum distributions (RMDs). a Roth 401(k) or similar types of accounts. RMDs are
The tax code incentivizes savings for retirement. required from most retirement accounts starting at age
Workers can contribute up to $17,500 in 2014 and up 70½. (The frst RMD can be taken as late as April 1 of
to $18,000 in 2015 in a defned-contribution plan (e.g., the calendar year following the year you turned age 70½,
a 401(k) plan). Higher limits of $23,000 and $24,000, though the second RMD must be taken by December
respectively, exist for workers age 50 or older. Taxpay- 31 of that same year.) The percentage of retirement
ers and spouses not covered by an employer retirement savings subject to the RMD increases every year. Roth
plan can contribute up to $5,500 ($6,500 for those age IRAs are exempt from RMDs, but Roth 401(k) plan
50 or older) to a traditional IRA in both 2014 and 2015, savings are not. (A Roth 401(k) can be rolled to Roth
though the deductions are subject to income phase-outs. IRA, however.) Those who are still working, contribute
Contributions to a tax-deferred retirement savings account to an employer-sponsored retirement plan and own less
reduce adjusted gross income (and thereby your tax li- than 5% of the company they work for can delay the
ability) as long as they are within the designated limits. frst RMD from a defned-contribution plan until April
In the year you attain the age of 70½, you no longer will of the year they retire.
be eligible to make contributions to a traditional IRA. A discussion of all the tax aspects of investing for
Contributions to Roth IRAs and Roth 401(k) plans and in retirement is beyond the scope of this guide.
are not tax-deductible. Like traditional IRAs, up to $5,500 Those of you seeking greater detail should read IRS
($6,500 for those age 50 or older) can be contributed Publication 590, Individual Retirement Arrangements.
by stocks held by the fund and passed municipal bonds more or less attractive state tax implications of switching from
through to the shareholder are eligible to taxable bonds. tax-free to taxable bonds before making
for the qualifed dividend tax treatment. Additionally, private-activity bonds any fnal portfolio decisions.
However, capital distributions and bond (a type of tax-free bond) could increase
interest are not. These payments are your exposure to the alternative mini- Consider Increasing
reported on Form 1099, which specifes mum tax since their interest income is Retirement Savings
the type of distribution. taxable for purposes of the alternative Increasing retirement savings
Read more on mutual fund distribu- minimum tax. There are exceptions, makes sense from a fnancial planning
tions in the online version of this article. including qualifed 501(c)(3) bonds, standpoint and, depending on your
New York Liberty bonds and Gulf adjusted income, may reduce your tax
Reconsider Taxable Versus Opportunity Zone bonds. Furthermore, bill. You have until April 15, 2015, to
Tax-Free Bonds the interest on qualifed bonds issued make an IRA contribution for the 2014
Interest from tax-free municipal in 2009 and 2010 is not subject to the tax year. See the box above for yearly
bonds is generally exempt from federal alternative minimum tax. Check with contribution limits to various types of
income taxes, unlike the interest from the bond issuer to fnd out the bond’s retirement plans.
taxable bonds, which is taxed as income. tax status.
Like any bond, credit quality matters, as You should review your bond and Review Tax Implications of Taxable
you want to ensure that the issuer will money market accounts to make sure Versus Tax-Deferred Accounts
not default. Changing yields can also that you are earning the highest aftertax The spread between capital gains
alter the aftertax yield advantage, making return. But don’t forget to consider the (continued on page 25)
16 AAII Journal