Tax season may be long forgotten for most taxpayers. After all, it’s been at least two months since the filing deadline, and the extension deadline is nearly four months away. Despite the distance from the deadlines, mid-year is an opportune time to review your tax situation. Not only will your C.P.A. likely have time to answer the phone, but there is time to make changes to improve your tax situation.
Consider having your tax adviser run a projection to see if you may be subject to the alternative minimum tax, which is a recapture mechanism, reclaiming tax breaks allowed by the IRS. Because there is no specific test for AMT, you must first figure your regular income tax, and then determine whether tax benefit items must be added back to your taxable income. Without these items added back, some taxpayers might be able to escape income tax entirely.
Medical deductions, itemized tax deductions, home mortgage interest, miscellaneous itemized deductions, personal exemptions, standard deductions and incentive stock options can cause the average taxpayer to be hit by AMT. If you and your tax adviser project you will have an unusual amount of deductions during the year that could trigger the AMT, you may look to postpone non-critical medical treatments to push deductions into a year when AMT may not apply. You may also consider capitalizing taxes on unproductive real estate or negotiating an accountable reimbursement plan with your employer to minimize business expense deductions.
Even if AMT is not a concern, a mid-year review can help you avoid penalties for underpayment of estimated taxes. Sole proprietors and owners of pass-through entities should revisit their 2014 revenue forecasts before the fourth quarter, when there is little time to change your tax situation. You should not be penalized if you pay at least 90 percent of your current tax liability, 100 percent of the previous year’s tax liability or 110 percent, if your adjusted gross income is more than $150,000.
Additionally, the IRS has greatly improved their matching of income and deductions to Schedule K-1 forms, so individual returns could be examined for gains, losses and excess distributions, and passive or active income reporting. Make sure your tax adviser is aware of all pass-through entities with which you are an owner or shareholder.
Finally, most taxpayers can affect their tax situation by maximizing contributions to their retirement plans, as this reduces your taxable income. For 2014, you can contribute up to $17,500, or $23,000 if you’re 50 or older, to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan. You can contribute up to $5,500 to a traditional IRA, $6,500 if you’re age 50 or older; however, the tax deduction for contributions to an IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $60,000 and $70,000. The phase-out begins at $96,000 for married filing jointly if the spouse who makes the IRA contribution is covered by a workplace retirement plan. While you can make 2014 IRA contributions up until the April 15, 2015 tax filing deadline, the longer your money is invested, the more compounding should work in your favor.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.