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Taxes 2014: Will Lawmakers Save Expiring Tax Benefits?

Dan Caplinger for TheFool.com writes: As the end of the year approaches, now's the time when most people start thinking about ways to save on their taxes in April. But many popular tax breaks are set to expire unless lawmakers take action to save them.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses those expiring tax provisions and how they could affect you in 2014 and beyond. Dan lists some popular expiring provisions, including deductions for teachers' expenses, pre-tax public transportation contributions, higher-education tuition deductions, and energy-efficiency tax credits, as well as tax-free mortgage forgiveness. Dan points out that expiring business tax provisions could have an even bigger impact, with immediate write-offs and accelerated depreciation having been a big boost to businesses. Dan concludes with a look at how investors could be affected, with Home Depot (NYSE: HD  ) and Lowe's (NYSE:LOW  ) having benefited from energy-efficiency credits while Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) could find it harder to get customers to modify mortgages if forgiven debt is subject to tax.

Be smart about your taxesKeeping track of new taxes for 2014 is just one way you can plan to cut your bill to Uncle Sam. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.

Are Your Investments Tax Efficient? 3 Things to Check

Daniel Cross for MoneyUnder30's writes: Are you a tax-efficient investor? Learn three ways to legally pay fewer taxes on your investments, a lesson that could save you tens of thousands over your lifetime.

In the investing world, tax efficiency refers to how well your investment portfolio takes advantage of legal ways to avoid or defer paying taxes on your returns. Tax-efficient investing sounds intimidating, but the basics are easier than you might think and important enough for every investor to learn.

Profits you earn from investments are taxed as capital gains. Prior to 2013*, long-term capital gains — anything held for more than one year — were taxed at 15 percent, while short-term capital gains — anything held for less than one year — were taxed at your ordinary income tax rate (28 percent, 35 percent, etc.)

*There are some changes coming this year that mostly affect investors with incomes over $200,000.

Your goal as a tax-efficient investor is to avoid paying short-term capital gains taxes and to postpone paying any capital gains taxes as long as you can. In addition, certain types of accounts (like IRAs) and investments (such as municipal bonds) allow you to defer paying taxes or avoid them altogether.

Here we’ll look at a couple easy ways to improve your investments’ tax efficiency.

Before diving in, we should note that your annual income plays a big role in whether many of these strategies will be beneficial, so it it’s a good idea to go over them with tax professional to see the true impact on your bottom line.

1. Look out for tax-inefficient mutual funds

If you’re investing in mutual funds, that should be your first stop in optimizing your investments for tax efficiency.

Although mutual funds offer plenty of benefits, they tend to be inefficient when it comes to passing on the tax consequences of their trades to individual investors. Mutual fund dividend payments made by a mutual fund — even if they are reinvested — will still need to be claimed as ordinary income, so a high dividend fund implies higher taxes.

Turnover is another major contributor to a mutual fund’s tax efficiency (or lack thereof). Turnover tells you how long the fund’s management holds onto stocks they buy. The higher the number, the more often the fund trades and the more trading costs are passed onto you. A tool like Morningstar’s free mutual fund information can easily give you a fund’s turnover rate.

To improve your tax efficiency, consider replacing high-turnover mutual funds with an equivalent exchange-traded fund (ETF).

2. Reevaluate a Roth IRA vs. a traditional IRA

Next, you’ll want to look at how IRAs and Roth IRAs compare and ensure you’re using the right one.

With a traditional IRA, money is invested before taxes, thus deferring taxes until you withdraw at age 59 ½. With a Roth IRA you pay taxes upfront. allowing you to withdraw money tax-free in retirement.

If you earn a lot now but expect your income to drop substantially in retirement, the traditional IRA may be the better route for you. I’ve covered this subject in more detail earlier and you can go to Bankrate.com to play around with the numbers and see which option is best for you.

3. Consider tax-advantaged investments

Certain investments come with preferential tax treatments.

Municipal bonds, for example, are used for funding of public projects like roads and schools. As a result, they provide income that’s free of federal taxes (and, in some cases, state and local taxes, too).

Treasury bonds are another example of an investment that’s tax-free at the federal level. Treasuries yield lower amounts than fully-taxable equivalents like corporate bonds, but Treasuries actually net you more after taxes.

Let’s take a look at an example to help illustrate how this works. The equation used to determine a comparable taxed investment versus a tax-free one is:

• Taxed Comparable = Tax Free Comparable / (1-Tax Rate).

If an investor’s tax bracket is 35 percent, and he can invest his money tax-free at 5 percent, then the amount he needs to make from a taxable investment is:

• 7.7 percent [7.7 percent = 5 percent / (1-35 percent)].

Now, what happens if taxes are raised to 45 percent instead of 35 percent? In this case, the investor would need to make 9.1 percent in order to make the same amount of money as the tax-free one at 5 percent.

You don’t need to plan your entire portfolio around the potential tax consequences of being profitable, but you should remain cognizant of how each year will look. You don’t want to be in a situation where you have to sell investments that may be locked into long term strategies just to pay the taxes due. There’s no faster way to become disillusioned with investing. Just being aware of what you own can go a long way toward your financial success.

2014 Capital Gains Tax Rates: Here's What You Can Expect

 Selena Maranjian, The Motley Fool writes: You probably know that there are many different kinds of tax rates, which change from time to time. For example, there are 2014 capital gains tax rates and 2014 income tax rates, and so on. Many people don't have a good sense of how to make the most of tax rates -- and thereby pay the least! Don't be one of those people.

In 2014, capital gains tax rates are on many folks' minds, as they are in most years. (And I'm not just talking about investors, as capital gains relate to a range of assets such as your house and your board-game collection and, yes, your stocks.) The main thing to understand about 2014 capital gains tax rates is that the IRS divides capital gains into two categories -- long-term and short-term -- and taxes them differently.

Long-term capital gains are from assets you've held for more than a year. One year is not enough -- it must be at least a year and a day. Short-term gains reflect holdings of one year or less. Note, too, that capital gains are generally taxed only when realized -- i.e., when you sell an asset. If you're sitting on some stock that has doubled in value, you don't owe Uncle Sam any money until you sell it.

The detailsSo what, exactly, are the 2014 capital gains tax rates? Well, for short-term gains, you're taxed at your ordinary income tax rate, which in 2014 might be just 10% or nearly 40%. (For most folks, it will be 15% or 25%.) 2014 long-term capital gains tax rates, which also apply to qualified dividends, are as follows:

• 0% if you're in the 10% or 15% marginal income tax brackets
• 15% if you're in the 25%, 28%, 33%, or 35% marginal income tax brackets
• 20% if you're in the 39.6% top bracket

These rates are for the 2013 tax year, which you cough up taxes for in 2014. There are a few exceptions for some assets other than stocks. Collectibles, for example, have a 2014 capital gains tax rate of 28%.

It's worth noting that you may be looking back fondly at the 2014 capital gains tax rates not too long from now. Tax-rate changes are always on the table, and some think it's likely that rates will rise, perhaps as early as 2015. The 2014 capital gains tax rates already include a little bump -- those in the highest tax bracket used to pay 15% for long-term gains, but that has been raised to 20%. There's also a 3.8% net investment income surtax for high earners.

What to doIf you think that in the near future capital gains tax rates will be significantly higher than 2014 capital gains tax rates, then you can take some strategic action. You might, for example, sell some assets with big gains this year or next so that you're taxed on them at lower rates. (Home sales are special beasts, though, as $250,000 of gain is excluded from taxation -- $500,000 for couples -- if you follow the rules.) You can also be smart about 2014 capital gains tax rates by offsetting gains with losses. Those stinkers in your portfolio do serve one useful purpose, after all.

Finally, you'd do well to consider hanging on to significantly appreciated assets for more than a year, if it will make a big tax difference to you. Be sure to consider the big picture, though: If it's a stock that has soared and that you think might give up some of that gained ground in the near future, selling now might be wiser than hanging on. Remember, however, that hanging on to healthy and growing stocks for many years remains a terrific path to wealth.

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The article 2014 Capital Gains Tax Rates: Here's What You Can Expectoriginally appeared on Fool.com.

Donating an IRA as a Year-End Tax Strategy

William Perez for About.com writes:  Individuals have the option to donate funds from their individual retirement to charity. This is a special tax break called a Qualified Charitable Distribution, and this provision expires at the end of 2013. Here's how it works.

A qualified charitable distribution is a distribution of funds from an individual retirement account (IRA) directly to a 501(c)(3) charitable organization. Individuals age 70.5 years old or older are permitted to make such distributions. The distribution occurs by being directly transferred to the charity from the IRA trustee.

What's the tax benefit? Qualified charitable distributions from an IRA are not included in the taxpayer's taxable income, and the taxpayer does not take a deduction for the charitable donation. Up to $100,000 per year may be treated as a tax-free qualified charitable distribution. Further, qualified charitable distributions satisfy the required minimum distribution rules.

Qualified charitable distributions are a tax-efficient way for higher-income seniors to donate to charity. Since the income from the distribution doesn't show up on the tax return, this keeps total income and adjusted gross income lower than they would be if a normal distribution were taken and the cash subsequently donated to charity. By keeping total income lower, this can prevent a higher portion of Social Security benefits being included in taxable income. And by keeping adjusted gross income lower, this can help manage AGI-sensitive thresholds for the medical expense deduction and for the 3.8% net investment income tax.

Sage : Year-end Tax Planning for Fixed Assets Management

Sage writes: Year-End Tax Planning for Fixed Assets Management.  
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