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2014 Year-End Tax Planning Basics

November 05, 2014

When it comes to year-end tax planning, you need tohave a good understanding of both your own financialsituation and the tax rules that apply. For some, that'sgoing to be a little challenging this year because ahost of popular tax provisions, commonly referred toas "tax extenders," expired at the end of 2013. Andwhile it remains possible that Congress couldretroactively extend some or all of the expiredprovisions, you can't count on it. Despite thisuncertainty, the window of opportunity for manytax-saving moves closes on December 31, so it'simportant to evaluate your tax situation now, whilethere's still time to affect your bottom line for the 2014tax year.

Timing is everythingConsider any opportunities you have to defer incometo 2015. For example, you may be able to defer ayear-end bonus, or delay the collection of businessdebts, rents, and payments for services. Doing somay allow you to postpone paying tax on the incomeuntil next year. If there's a chance that you'll be in alower income tax bracket next year, deferring incomecould mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into2014. If you itemize deductions, you might acceleratesome deductible expenses like medical expenses,qualifying interest, or state and local taxes by makingpayments before year-end. Or, you might considermaking next year's charitable contribution this yearinstead.

Sometimes, however, it may make sense to take theopposite approach--accelerating income into 2014,and postponing deductible expenses to 2015. Thatmight be the case, for example, if you can project thatyou'll be in a higher tax bracket in 2015; paying taxesthis year instead of next might be outweighed by thefact that the income would be taxed at a higher ratenext year.

Factor in the AMTMake sure that you factor in the alternative minimumtax (AMT). If you're subject to the AMT, traditionalyear-end maneuvers, like deferring income andaccelerating deductions, can have a negative effect.That's because the AMT--essentially a separate,parallel, income tax with its own rates andrules--effectively disallows a number of itemizeddeductions. For example, if you're subject to the AMTin 2014, prepaying 2015 state and local taxes won'thelp your 2014 tax situation, but could hurt your 2015bottom line.

Additional considerations forhigher-income individualsChanges that first took effect in 2013 complicateplanning opportunities for higher-income individuals.First, a higher 39.6% marginal tax rate applies if yourtaxable income exceeds $406,750 in 2014 ($457,600if married filing jointly, $228,800 if married filingseparately, $432,200 if head of household); prior to2013, the highest marginal tax rate was 35%. If yourtaxable income places you in the top 39.6% taxbracket, a maximum 20% tax rate on long-termcapital gains and qualifying dividends also generallyapplies (prior to 2013, the top rate that generallyapplied was 15%).

Second, if your adjusted gross income (AGI) is morethan $254,200 ($305,050 if married filing jointly,$152,525 if married filing separately, $279,650 if headof household), your personal and dependencyexemptions may be phased out for 2014, and youritemized deductions may be limited. If your AGI isabove this threshold, be sure you understand theimpact before accelerating or deferring deductibleexpenses.

Additionally, a 3.8% net investment income tax(unearned income Medicare contribution tax) mayapply to some or all of your net investment income ifyour modified AGI exceeds $200,000 ($250,000 ifmarried filing jointly, $125,000 if married filing

AMT triggers

You're more likely to besubject to the AMT if youclaim a large number ofpersonal exemptions,deductible medicalexpenses, state and localtaxes, and miscellaneousitemized deductions. Othercommon triggers includehome equity loan interestwhen proceeds aren't usedto buy, build, or improveyour home, and theexercise of incentive stockoptions.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

separately, $200,000 if head of household).

Note: Individuals with wages that exceed $200,000($250,000 if married filing jointly or $125,000 ifmarried filing separately) are also subject to anadditional 0.9% Medicare (hospital insurance) payrolltax.

IRAs and retirement plansMake sure that you're taking full advantage oftax-advantaged retirement savings vehicles.Traditional IRAs and employer-sponsored retirementplans such as 401(k) plans allow you to contributefunds on a deductible (if you qualify) or pretax basis,reducing your 2014 taxable income. Contributions toa Roth IRA (assuming you meet the incomerequirements) or a Roth 401(k) aren't deductible orpretax, so there's no tax benefit for 2014, but qualifiedRoth distributions are completely free from federalincome tax, which makes these retirement savingsvehicles appealing.

For 2014, you can contribute up to $17,500 to a401(k) plan ($23,000 if you're age 50 or older), and upto $5,500 to a traditional IRA or Roth IRA ($6,500 ifyou're age 50 or older). The window to make 2014contributions to an employer plan typically closes atthe end of the year, while you generally have until theApril 15, 2015, tax filing deadline to make 2014 IRAcontributions.

Roth conversionsYear-end is a good time to evaluate whether it makessense to convert a tax-deferred savings vehicle like atraditional IRA or a 401(k) account to a Roth account.When you convert a traditional IRA to a Roth IRA, ora traditional 401(k) account to a Roth 401(k) account,the converted funds are generally subject to federalincome tax in the year that you make the conversion(except to the extent that the funds representnondeductible after-tax contributions). If a Rothconversion does make sense (whether a Rothconversion is right for you depends on many factors,including your current and projected future income taxrates), you'll want to give some thought about thetiming of the conversion. For example, if you believethat you'll be in a better tax situation this year thannext (e.g., you would pay tax on the converted fundsat a lower rate this year), you might want to thinkabout acting now rather than waiting.

If you convert a traditional IRA to a Roth IRA and itturns out to be the wrong decision (things don't go the

way you planned and you realize that you would havebeen better off waiting to convert), you canrecharacterize (i.e., "undo") the conversion. You'llgenerally have until October 15, 2015, torecharacterize a 2014 Roth IRAconversion--effectively treating the conversion as if itnever happened for federal income tax purposes. Youcan't undo an in-plan Roth 401(k) conversion,however.

"Tax extenders"A number of popular tax breaks expired at the end of2013. It's possible that some or all of these provisionswill be retroactively extended, but there's noguarantee. You'll want to consider carefully thepotential effect of these provisions on your 2014 taxsituation and stay alert for any late-breaking changes.Tax-extender provisions include:

• The ability to make qualified charitablecontributions (QCDs) of up to $100,000 from anIRA directly to a qualified charity if you were 70½or older. Such distributions were excluded fromincome but counted toward satisfying any RMDsyou would otherwise have to receive from yourIRA.

• Increased Internal Revenue Code (IRC) Section179 expense limits and "bonus" depreciationprovisions.

• The above-the-line deduction for qualifiedhigher-education expenses.

• The above-the-line deduction for up to $250 ofout-of-pocket classroom expenses paid byeducation professionals.

• For those who itemize deductions, the ability todeduct state and local sales taxes in lieu of stateand local income taxes.

• The ability to deduct premiums paid for qualifiedmortgage insurance as deductible interest on IRSForm 1040, Schedule A.

Talk to a professionalWhen it comes to year-end tax planning, there'salways a lot to think about. A tax professional canhelp you evaluate your situation, keep you apprised ofany legislative changes, and determine whether anyyear-end moves make sense for you.

Required minimumdistributions

Once you reach age 70½,you're generally required tostart taking requiredminimum distributions(RMDs) from traditionalIRAs andemployer-sponsoredretirement plans (specialrules apply if you're stillworking and participating inyour employer's retirementplan). You have to makethe withdrawals by the daterequired--the end of theyear for most individuals--ora 50% penalty tax applies.

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