More Year-End Tax 2014 Planning Insights for Medical Professionals

Posted on October 30, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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Timing of charitable gifts, and type of property contributed, can be important

By Perry D’Alessio CPA www.DaleCPA.com

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Charitable contributions should be timed so as to obtain the maximum tax benefits, either in 2012 or 2013. If a taxpayer, like a physician, plans to make a charitable contribution in 2013, s/he should consider making it this year instead if speeding up the deduction would produce an overall tax saving, e.g., because the taxpayer will be in a higher marginal tax bracket in 2012 than in 2013.

On the other hand, a taxpayer who expects to be in a higher bracket in 2013 should consider deferring a contribution until that year. This task is more difficult than in prior years because of uncertainty over future rates.

In making any sizeable charitable contributions, to the extent possible, clients should make the contributions in appreciated capital gain property that would result in long-term capital gain if sold. This way, a deduction generally is obtained for the full value of the property, such as shares of stock, etc., while any regular income tax on the appreciation in value is avoided. (However, for tangible personal property, this favorable treatment is only available if the donated item is related to the exempt purpose of the donee charity).

Observation:

If rates rise after this year, the tax savings on a later sale could be even greater.

It should be noted, however, that contributions of appreciated capital gain property generally are subject to a 30%-of-AGI (Adjusted Gross Income) ceiling, instead of the usual 50% ceiling, unless a special election is made to reduce the deductible amount of the contribution.

Observation:

Making the election will limit the donor’s deduction to the basis of the contributed property. In most cases, the election should be made only if the fair market value of the property is only slightly higher than the basis of the property.

IRA distributions to charity

Older taxpayers who plan to use individual retirement account (IRA) distributions to make charitable contributions should bear in mind that the favorable tax provision for doing so expired at the end of last year. That provision allowed taxpayers age 70 1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable IRA distributions that were qualified charitable distributions. Such distributions weren’t subject to the charitable contribution percentage limits and weren’t includible in gross income. Since such a distribution was not includible in gross income, it would not increase AGI for purposes of the phase-out of any deduction, exclusion, or tax credit that was limited or lost completely when AGI reached certain specified levels.

To constitute a qualified charitable distribution, the distribution had to be made after the IRA owner attained age 70 1/2 and made directly by the IRA trustee to specified charitable organization. Also, to be excludible from gross income, the distribution had to otherwise be entirely deductible as a charitable contribution deduction under the Internal Revenue Code provisions, without regard to the charitable deduction percentage limits.

Even though a direct distribution from an IRA to a charity was not included in the taxpayer’s gross income, it was taken into account in determining the owner’s required minimum distribution (RMD) for the year.

Qualified Contributions

Qualified charitable contributions aren’t available for distributions made in tax years beginning after Dec. 31, 2011 While there has been some talk of an extending this provision, it is unclear whether it will make it in any such package and if it does, whether there would be a rule allowing January 2013 distributions to be treated as made on Dec. 31, 2012.

Thus, while IRAs may be a potential source of funds for making charitable contributions between now and year end, clients age 70 1/2 or older must be informed that using an IRA to make contributions will be more costly if the special break is not retroactively revived.

Recommendation: An eligible taxpayer interested in making a charitable contribution from his IRA directly to a charity, and who hasn’t yet taken his 2012 RMD from the IRA, should consider waiting until the end of the year to take the RMD.

Recommendation: An eligible taxpayer interested in making a charitable contribution from his IRA directly to a charity, and who hasn’t yet taken his 2012 RMD from the IRA, should consider waiting until the very end of the year to take the RMD. If the rules to see if qualified charitable distributions are revived.

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One Response

  1. Bobby Whirley CPA, on November 21, 2014 at 12:18 PM said:

    More .. end of Year 2014 TAX planning

    As we approach the end of the year, I personally get excited about the Holidays and the reason for our celebration. But, we also need to think about the constant push and pull of our finances and how to plan for our tax year end. There are many tax-saving steps that can be taken before the end of this year.

    Here is a list of the most important actions that should be taken no later than Dec. 31, 2014 to save taxes:

    … Realize losses on stock while substantially preserving investment position,

    … Convert investment income taxable at regular rates (e.g., interest income) into qualifying dividend income,

    … Arrange with employer to defer bonus until 2015,

    … Use credit card to pay business expenses,

    … Pay contested taxes to deduct them this year while continuing to contest them next year,

    … Put equipment in service before year-end to qualify for first-year depreciation deduction based on half-year convention,

    … Make expenditures qualifying for the business property expensing election,

    … Settle insurance or damage claim if this will maximize casualty loss deduction,

    … Apply bunching strategy to “miscellaneous” itemized deductions, medical expenses, and other itemized deductions to increase deductible amounts.

    … Increase withholding to eliminate or reduce estimated tax penalty,

    … Set up self-employed retirement plan,

    … Make gifts taking advantage of the $14,000 gift tax exclusion (this doesn’t reduce income taxes but if you are using a gifting plan you need to remember to make the gifts occur by year end),

    … Consider deferring a debt cancellation event until 2015,

    … Take steps to avoid or minimize income tax on Social Security benefits,

    … Structure real estate deals to avoid paying interest on tax deferred under installment method,

    … Step up level of participation in business activity to meet material participation standard under passive loss rules,

    … Dispose of passive activity to free up suspended losses,

    … Ask employer to increase withholding of state and local taxes to pull the deduction of those taxes into 2014,

    … Extend subscriptions to professional journals, pay union or professional dues, enroll in (and pay tuition for) job-related courses, etc., to bunch into 2014 miscellaneous itemized deductions subject to the 2%-of-AGI floor,

    … Increase basis in S corporation or partnership to make possible a 2014 loss deduction,

    Charitable contributions

    The timing of charitable contributions can have an important impact on year-end tax planning. Note that for 2013 (but not for 2014, unless Congress extends this tax break), individual taxpayers who are at least 70-1/2 years old could contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduced their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity.

    Some taxpayers who would take advantage of this tax break for this year, if it were extended, should consider deferring until year-end their required minimum distributions (RMDs) for 2014. Just wait a bit longer to make that distribution. I will let you know if we get the extension of this benefit.

    … Donate appreciated stock to charities rather than using cash/checks.

    I will send out updates and items for discussion as we approach the end of the year. Please be sure to touch base with someone on our team to make sure the year end does not surprise you. Tax rates are up and many deductions are phasing out.

    Bobby Whirley CPA
    [Managing Partner]
    Whirley & Associates, LLC + ProActive Advisory
    2500 Northwinds Parkway
    Suite 190
    Alpharetta, GA 30009

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