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Tax policy will be driven by the calendar this next year as many tax policies will expire come Jan. 1, 2013, no matter who wins the election. The point to remember is that even if Congress addresses these issues in the next year, your financial plan will be affected in some way no matter what income bracket you are in.
However, trying to predict what will actually happen is a lesson in spinning plates. You never know what plates drop first. So here are some tips on ways to at least take advantage of what we do know.
#1. Roth Conversions: Individuals pay ordinary income tax when converting a traditional IRA to a Roth IRA. The fair market value of the securities or cash becomes income for the year on the day the conversion is recorded. At today’s tax rates it may be better this year than waiting. There is no longer an income limit on conversions so anyone with IRA’s can convert. Because it may push you into a higher income tax bracket, conversions should be discussed with a tax professional. Now is a great time of year to talk about your options.
#2. Consider municipal bonds as a tax-free income possibility. Even if you aren’t in high tax brackets a municipal bond gives you a low risk option for earning a little more on your investments.
#3. Revisit asset allocation. As part of the review process this is always part of the conversation. Best thing is to bring your 1040 or tax forms with you to your next review. Let your tax professional know who your advisor is and vice versa.
#4. Revisit your estate plan. If you don’t have a plan, let’s discuss where you are and if you need one.
#5. Lastly, don’t let the tail wag the dog. Review your investments and continue making deposits to retirement accounts and savings accounts. Having a good financial plan is the best plan for dealing with uncertain times.
Most of the tax forms you will receive over the next few months fall within the 1099 series of forms. Many of them are used to report payments or transaction to the IRS and need to be filed with your tax return. Be sure to have the forms on hand when you are preparing your taxes yourself or provide the forms with all other tax related documentation when you meet with your tax preparer.
There are several types of Form 1099 documents that begin arriving in late January and February. Here are just a few of the most common ones you might receive:
1099-B: Brokers or mutual fund companies must send this form when you sell stock. It shows the amount and date of the sale, and provides cost basis information if supplied to the company.
1099-DIV, Dividends and Distributions: This form must be filed if you own stock or other securities and receive over $10 in distributions, such as dividends, capital gain distributions, or nontaxable distributions, that were paid on stock and liquidation distributions.
1099-G: Use this form to report unemployment compensation, state and local income tax refunds, agricultural payments, and taxable grants.
1099-INT, Interest Income: Financial institutions are required to send you this form if they pay you more than $10 in interest during the year.
1099-LTC: Long-Term Care and Accelerated Death Benefits. Will show distributions made from these types of contracts.
1099-MISC: This form must be filed if you pay an independent contractor at least $600 for professional services during the year.
1099-Q: File this form if you receive payments from qualified education programs (Under Sections 529 and 530).
1099-R: This is the form filed when you get a distribution from a retirement plan, such as an IRS, Roth IRA and 401(k) plan.
1099-S: Use this form when reporting proceeds from real estate transactions.
SSA-1099: Reports Social Security benefits received from the Social Security Administration.Not to be confused with Form 1099-R, which reports retirement benefits received from non-SSA sources, such as a pension or an IRA.
1099-SA: Distributions From an Health Savings Account, Archer MSA, or Medicare Advantage MSA
If you receive a 1099 form not listed above you can visit the IRS.gov website or ask your tax preparer for information.
Most of the forms will be received in the next few weeks. Some 1099’s that are reporting dividends may also come in a corrected form after February. If you receive updated 1099’s and you have already filed your taxes, make sure you have updated information into your tax preparer as soon as you receive them.
Ask many Americans about their experience with tax time and they are likely to describe lots of paperwork, confusing rules, and late nights on their computer. But it doesn’t have to be that way. Getting organized now – instead of waiting until the days before April 15 – may help streamline your tax preparation and help you identify deductions that you might otherwise overlook in the last-minute rush.
You’ll need the right paperwork to get started (see table below), but you may want to consult a tax advisor to determine whether you need to consider additional factors that are unique to your situation.
Tax Preparation Documents
Document Why You Need It
Form W-2 from your employer The starting point for determining your taxable income.
Form 1099 and other statements from investment firms Helps you compute capital gains, which are taxable, or capital losses, which you may be able to deduct. Dividends and interest are taxable at ordinary income tax rates. Contributions to a traditional IRA may be tax deductible if you meet income thresholds established by the IRS.
Real estate records You may be able to deduct mortgage interest and real estate taxes. Expenses associated with investment real estate may be deductible. If you sell real estate at a profit, you may be required to pay taxes on a portion of the gain.
After you have accounted for the most common aspects of tax preparation, dig a little deeper to discover other areas of your life that may offer tax breaks.
Children are not just a blessing to your family. They also bring with them a host of potential tax breaks.
• Dependency exemption. For the 2014 tax year you can deduct $3,950 for each qualifying child you claim as a dependent on your tax form. If your adjusted gross income is above a certain level, you may not receive the full exemption amount.
• Child Tax Credit. This credit can be worth as much as $1,000 per child under the age of 17 that you claimed as a dependent on your tax return. For 2014, the amount of the credit begins to phase out for joint filers with adjusted gross incomes that exceed $110,000 and for single filers and heads-of-household whose income exceeds $75,000.
• Child Care Credit. If you paid childcare for a dependent child under age 13 so you could work, you can earn a credit of between $600 and $1,050 in 2014. If you are paying for the care of two or more children, the potential credit you can earn increases to between $1,200 and $2,100. As with most other tax breaks, the size of the credit depends on your income and, in the case of this particular credit, how much you pay for care. (You can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).1
• Adoption credit. If you adopted a child in 2014, you can claim a credit of up to $13,190 help offset the cost. Income phase-outs apply for adjusted gross incomes that range from $197,880 to $237,880.1
You may be able to benefit from either a tax deduction or a tax credit if you had any of these types of expenses during 2014.
• Purchased an electric car or plug-in hybrid.
• Had student loan debt paid by parents.
• Had out-of-pocket expenses related to a job search.
• Had moving expenses associated with a first job.
• Were self-employed and paid Medicare premiums.
• Had jury duty pay that was surrendered to employer.
• Utilized the American Opportunity Credit and/or other government-sponsored education programs to pay for education expenses.
• Made energy-saving home improvements.
These are just a few of the tax savings that may await you come April 15. Of course, your individual circumstances will determine if you are eligible for these and other tax breaks. Your tax professional should be able to provide more information on what you do and don’t qualify for.
This communication is not intended to be tax advice and should not be treated as such. Each individual’s situation is different. You should contact your tax professional to discuss your personal situation.
1Source: TurboTax, “Birth of a Child,” updated for tax year 2014.
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