Now is the time for year-end tax planning

Kurt Rossi for the NJ Times of Trenton writes: The ideal time to address 2014 tax planning is in – you guessed it – 2014. Unfortunately, many taxpayers wait until the tax preparation months of March and April of the following year to begin thinking about strategies to reduce their taxes. Remember, there is a difference between tax preparation and tax planning. Now is the time to address year-end tax planning opportunities that may help reduce the amount you pay to Uncle Sam. Since any additional after-tax income can be applied to other critical goals such as a retirement savings, education funding, paying down debts or even purchasing a home, be sure to review the pro-active strategies below.

Harvest tax-losses and gains
While taxes should not be the overriding factor when developing an investment strategy, it is certainly an important component to consider – especially in taxable accounts. It may be advantageous for some taxpayers to examine their portfolio in search of investments that may have declined in value. Selling off underperforming investments before year-end to lock in a tax loss can be beneficial in many ways. First, losses can be used to offset other investment gains you may have realized this year. This can be especially helpful to combat short-term capital gains taxes, which are taxed at ordinary income rates. Additionally, you are able to carry forward an unlimited amount of losses into future tax years. These losses can be applied toward future gains and you can also write off $3,000 per year of unused losses against ordinary income. Keep in mind that IRS wash sale rules may apply, preventing you from claiming a loss if you buy a substantially identical investment within 30 days of the sale.

Depending on your income level and strategy, tax gain harvesting may be beneficial, too. You may ask why you might want to take a capital gain in a given year. Well, if your taxable income is $73,800 or less for those married filing jointly, or $36,900 or less if filing single, you’re eligible for the zero percent long-term capital gain rate for assets held greater than one year. That’s right: zero percent. This may be useful if you find that your income has suddenly dropped in a given year as this could allow for the sale of appreciated assets at very attractive capital gains rates.

Max out retirement plan contributions
Whether contributing toward a traditional pre-tax 401(k) or an after-tax Roth 401(k), funding your retirement plan to the fullest extent may help reduce your tax liability now or in the future. For 2014, taxpayers can save up to $17,500 in their plan and those over the age of 50 can contribute a total of $23,000. Be sure to determine whether you would benefit more from pre-tax or after-tax contributions.

Business owners should also consider reviewing their existing retirement plan or the implementation of a new plan. From incorporating a cash balance plan to adding profit-sharing contributions, there are many features that may help ensure contributions and respective deductions are maximized.

Review a Roth conversion
Speaking of a Roth, it may be wise to consider converting pre-tax retirement accounts like a traditional IRA to a Roth IRA before year-end. In a Roth conversion, your pre-tax account is withdrawn and placed in a Roth IRA with ordinary income tax paid on the amount withdrawn. Unlike the pre-tax IRA, distributions from the Roth IRA are tax-free in retirement – assuming the account has been held for at least five years. That’s right – no taxes on the earnings and also no required minimum distributions. This can be especially powerful when the account is inherited by beneficiaries. A Roth conversion can make sense if you can answer yes to two questions: One, you feel confident that you will be in a higher tax bracket in retirement and two, you have funds outside the IRA you are converting that can be used to pay the tax bill. It may not be wise to pay the tax liability on the amount converted from IRA funds as it will substantially reduce the balance of the retirement account. Consider working with a professional to run calculations that can simulate the conversion to see if it works for you.

Avoid underpayment penalties
Now is also a great time to carefully review amounts being withheld for taxes. While neither overpaying nor underpaying your taxes is ideal, an underpayment can lead to inadvertent penalties. According to Lee Boss, certified public accountant and managing director at the Mercadien Group in Princeton, “Taxpayers should review estimates of Federal and state tax liabilities to either fully fund expected tax liabilities by year-end or make enough payments as protective estimates, generally 110 percent of the prior year tax liability, to avoid underpayment penalties.” Underpayment penalties can be costly so be sure to review this with your tax professional.
Donate to charity

Additional after-tax income can be applied to other goals such as a retirement savings, education funding, paying down debts or even purchasing a home

Charitable donations are a great way to reduce your tax bill while simultaneously supporting an organization that is important to you. While this can certainly be a win-win, there are some important things to remember. First, you must file form 1040, itemize your deductions and donate to a qualified charity in order benefit from the deduction. Form 8283 - Noncash Charitable Contributions, must be filed if your deduction for all noncash gifts is more than $500 for the year. Donated cash or property of $250 or more must be accompanied by a written statement from the organization with a description of the donation amount. Regardless of the donation, maintain clear records to substantiate the contributions being made.
Gifting

While gifting may not immediately reduce your taxable income, it can help with future estate taxes that could be owed. For 2014, you are able to gift up to $14,000 to whomever you like. With the federal estate tax threshold at $5.34 million per person, many families are less concerned with federal estate tax than ever before. However, many states like New Jersey have lower thresholds and try to impose both an estate and inheritance tax. For this reason, gifting before year-end can be beneficial financially by potentially reducing estate taxes imposed on the state level.

Also consider reviewing any unused amounts in flexible spending accounts and make sure all required minimum distributions, or RMDs, are taken. Remember, the ability to address tax issues is compromised once the year comes to a close. Since everyone’s situation is unique, consider speaking to your financial and tax advisers to determine the most appropriate tax strategies for you.

Liberty Tax shareholders register to sell blocks of stock

Dave Mayfield for the Virginia Pilot writes: Two large shareholders of Liberty Tax Inc. have registered to sell blocks of stock in the Virginia Beach-based company.

The potential sales were disclosed in a document filed this week by Liberty with the U.S. Securities and Exchange Commission, which must approve the registration for it to become effective.

In its filing, Liberty said that Datatax Business Services Ltd., its largest shareholder, has registered to sell 2 million of the 3.46 million shares of Class A common stock it holds in the tax preparer. That would reduce the London, Ontario-based company's share of the common stock to 11.3 percent.

In addition, Envest Funds has registered to sell all of its approximately 870,000 common shares in Liberty.

Datatax is controlled by a Liberty board member, Steven Ibbotson. Another board member, John Garel, is listed in Liberty documents as Virginia Beach-based Envest's beneficial owner.

Liberty also registered for an offering of up to $200 million in securities, including senior and subordinated debt, common and preferred stock, depositary shares and warrants. It did not specify the amounts of each that would be issued.

Kathy Donovan, Liberty's chief financial officer, said Friday that the filing is intended to give the company more flexibility to raise money - but that no specific offering is planned at this time. She said Liberty recently became eligible for the offering, what's known as a "shelf registration," when the market value of shares owned by non-insiders topped $75 million.

Donovan said Datatax has indicated for some time that it wants to reduce its ownership of Liberty to below 10 percent, and that the registration would allow it to accomplish that sooner than it otherwise could.

She said neither Datatax nor Envest is required to sell the shares they've registered for potential disposal.

The registration would be effective for three years, Donovan said.

Advanced Tax Strategy to Avoid State Income Taxes

Robert Pagliarini for the Huffington Post writes: While corporate tax inversions are getting all the press lately, there is another tax strategy - call it a "personal tax inversion" - that can help individuals avoid taxes. However, similar to corporate tax inversions, the personal version is becoming just as controversial. Earlier this year New York state, which was losing an estimated $150 million a year through tax avoidance, effectively closed this tax loophole for New York residents. Other states may follow, but until then, if you expect a windfall from a one-time gain or an investment account that you anticipate to produce significant income over the coming years, a personal tax inversion might make sense.

The personal tax inversion strategy is not right for every situation, but under the right circumstances, it can be an effective way to pay less state income tax. The technique, which works best if you live in a state with a high income tax - requires the use of an Incomplete Non-Grantor Trust. The Incomplete Non-Grantor Trust allows you to shift assets to another state with a lower or no state income tax such as Nevada or Delaware. These structures are also referred to as NINGs or DINGs to reflect the state (Nevada and Delaware, respectively) in which the trust is located. As Neil Schoenblum, Senior Vice President at First American Trust in Las Vegas, Nevada, explains, "The NING affords certain persons with significant investment income a rare opportunity to reduce their total tax cost by avoiding all state income taxes that might otherwise be imposed."

How a NING/DING Works
There are grantor trusts and non-grantor trusts. A grantor trust is established by an individual called the grantor. With a grantor trust, the grantor (i.e., you) is treated as owning the trust assets for income tax purposes, and as such, is responsible for any income tax due on the assets within the trust. For example, if you live in California and simply have a trust administered in Nevada, you will still be taxed as a California resident.

On the other hand, a non-grantor trust is where you place assets into the trust and give up enough tax strings so that you are no longer considered the "owner" for tax purposes. So now the trust itself and not you is responsible for paying the income tax. If the trust is administered in a tax-free state such as Nevada, the trust pays no state tax, but don't celebrate too soon. If you transfer assets outside of your control, you run the risk of having to pay gift taxes. So while you may avoid state income tax, you would most likely have to pay federal gift tax or at least use up your gift/estate tax exclusion if the drafting attorney isn't careful. A non-grantor trust isn't going to work well if that were to happen.

The solution is to use a NING or DING. The "secret sauce" of this structure is the careful drafting of the documents. The goal is to keep enough control that you don't get accused of gifting the assets and having to pay gift tax, but not retain so much control that you are responsible for state income tax. This is an advanced strategy that requires the guidance of a good estate or tax attorney. Estate planning and asset protection attorney, Steve Oshins, of Oshins & Associates in Las Vegas, Nevada says, "Nevada has become the go-to state for this technique. I have done more NING Trusts this year than ever before given the favorable NING Trust Rulings that the IRS has recently issued. People love to save state income tax."

An added benefit is that NINGs and DINGs not only provide tax minimization but also asset protection. If you are interested in minimizing state income taxes, have your advisers run an analysis to see if a Nevada Incomplete Non-Grantor Trust (NING) or a Delaware Incomplete Non-Grantor Trust (DING) will work for you.