New Standard Mileage Rates Now Available; Business Rate to Rise in 2015IR-2014-114, Dec. 10, 2014
WASHINGTON — The Internal Revenue Service today issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication 17, Your Federal Income Tax.
Besides the standard mileage rates, Notice 2014-79, posted today on IRS.gov, also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.
In a few months, millions of Americans will be filing either form 8962 to reconcile the advance premium tax credit they received with the tax credit they were actually due, or form 8965 because they claim an exemption from the shared responsibility (individual mandate) provision of the Affordable Care Act.
By the close of open enrollment in April, 6.7 million Americans had chosen a qualified health plan with premium tax credits, and many more have since enrolled in a QHP through a special enrollment period and received tax credits. Each of them will need to file a form 8962. The Congressional Budget Office estimates that 30 million Americans are potentially subject to the shared responsibility requirement, and that 23 million of them may qualify for an exemption. Many of the 23 million will have to file a form 8965.
On September 15, 2014 the Internal Revenue Service released draft instructions for form 8965. On September 17, 2014, the IRS released draft instructions for form 8962. It is difficult to overstate how complicated these instructions are. The tax credit and individual responsibility provisions of the ACA were complicated to begin with, but have become ever more complex as new exceptions and special rules have been created as implementation of the legislation has proceeded. Many of the mostly low income Americans who will be completing these forms are marginally literate, at least in English, and have been accustomed to filing very simple tax forms like the 1040-EZ (which cannot be used by an individual claiming a tax credit) or perhaps not to filing taxes at all. They are likely to be confused, frustrated, even angry, and certainly bewildered, completing these forms. It is to be hoped that most of them will be assisted by well-trained tax preparers.
Mike McVay has extensive training related to the correct filing and processing of IRS form 8962. Although there will be an additional charge for this form, Mike beleives the correct advice from his firm will save tax liability for your 2015 tax year.
1. Defer your income
Income is taxed in the year it is received – but why pay tax today if you can pay it tomorrow instead?
It's tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year – as long as it is standard practice in your company to pay year-end bonuses the following year.
If you are self-employed or do freelance or consulting work, you have more leeway. Delaying billings until late December, for example, can ensure that you won't receive payment until the next year.
Whether you are employed or self-employed, you can also defer income by taking capital gains in 2015 instead of in 2014.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that's likely, you may want to accelerate income into 2014 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
2. Take some last-minute tax deductions
Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the timing. You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash. Better yet, as long as you've owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.)
Other expenses you can accelerate include an estimated state income tax bill due January 15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up deductions could be a blunder if you're subject to the alternative minimum tax, as discussed below.)
Make sure you'll be itemizing for 2014 rather than claiming the standard tax deduction. Unless the total of your qualifying expenses exceeds $6,200 if you are single, or $12,400 if you're married filing a joint return, itemizing would be a mistake.
If you're on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end planning stresses pushing as many deductible expenses as possible into the following year when they'll have more value.
3. Beware of the Alternative Minimum Tax
Sometimes accelerating tax deductions can cost you money… if you're already in the alternative minimum tax (AMT) or if you inadvertently trigger it.
Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT. State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2014, don’t pay the installments that are due in January 2015 in December 2014.
4. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2015 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
5. Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($17,500 for 2014, $23,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA. You have until April 15, 2015 to make IRA contributions for 2014, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. Making deductible contributions also reduces your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2014, plus an extra $1,000 if you are 50 or older. Use ourIRA Calculator to see how much you can contribute.
If you are self-employed, the retirement plan of choice is a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline (including extensions) for your 2014 return. The amount you can contribute depends on the type of Keogh plan you choose.
6. Avoid the kiddie tax
Congress created the "kiddie tax" rules to prevent families from shifting the tax bill on investment income from Mom and Dad's high tax bracket to junior's low bracket. For 2014, the kiddie tax taxes a child's investment income above $2,000 at the parents' rate and applies until a child turns 19. If the child is a full-time student who provides less than half of his or her support, the tax applies until the year the child turns age 24.
So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,000, you’ll end up paying tax at 15 percent on the gain, rather than the zero percent rate that is applicable for most children.
7. Check IRA distributions
You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 ½. Failing to take out enough triggers one of the most draconian of all IRS penalties: A 50 percent excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. After that, annual withdrawals must be made by December 31 to avoid the penalty.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.
8. Watch your flexible spending accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer part of their pay into a special account which can then be tapped to pay child care or medical bills.
The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2014 set-aside money as late as March 15, 2015. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
9. Be sure to calculate any healthcare tax credits properly. If you made more income than calculated by the healthcare.gov web site then you will be paying this back during the tax filing season.
10. Be sure to account for all 1099 forms. These forms are matched up electronically. If you do not have copies of all issued 1099's for your tax preparer to report could mean more tax and penalties 12-18 months from filing your tax return.
For more information about 2014 tax filing, please call us at 251.216.7911. Mike McVay will be filing taxes on Janurary 15, 2015. You can also send Mike an email at firstname.lastname@example.org
Mike McVay, Tax Accountant Blog
Certified QuickBooks ProAdvisor & Licensed Tax Accountant Pensacola, FL
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