With the 2013 Tax filing season behind us, the 2014 tax planning season is just beginning. Included this month are two areas where advanced planning can reduce your tax bill. There is also an update from the IRS on the tax treatment of virtual currencies like Bitcoin for those of you using or contemplating their use. A checklist of ideas on how to improve security of your identity rounds out this month’s newsletter.
Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.
Planning: Leverage Kiddie Tax Rules
Now is the time to take action on reducing next year’s tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the “kiddie tax” rules.
The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2014 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,000 be taxed at their parent’s tax rate.
|Children under the age of 19|
|Full-time students under the age of 24 and providing less than half of their own financial support|
|Children with unearned incomes above $2,000|
Who/What it does NOT apply to
|Earned income (wages and self-employed income from things like babysitting or paper routes)|
|Children that are over age 18 and have earnings providing more than half of their support|
|Older children married and filing jointly|
|Children over age 19 that are not full-time students|
|Gifts received by your child during the year|
How it works
|The first $1,000 of unearned income is generally tax-free|
|The next $1,000 of unearned income is taxed at the child’s (usually lower) tax rate|
|The excess over $2,000 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615)|
So while your child’s unearned income above $2,000 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:
|Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.|
|Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.|
|Leverage gifts. If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.|
Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.
2015 Health Care Savings (HSA) Account Limits Announced
The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.
What is an HSA?
An HSA is a tax advantaged savings account to pay for qualified health care costs. The account consists of wages contributed on a pre-tax basis. There is no tax on the funds contributed or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules.
|Health Savings Account (HSA) Limits||2014||NEW! 2015||Change|
|Maximum Annual Contribution||Self||$3,300||$3,350||+$50|
|Add: 55+ catch up
|Health Insurance Requirements|
|Minimum Deductible||Self coverage||$1,250||$1,300||+$50|
|Out-of-pocket Maximum||Self coverage||$6,350||$6,450||+$100|
Note: HSAs require a qualified High Deductible Health Plan (HDHP). To qualify, a health insurance plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.
Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential tax benefits.
Virtual Currency is Property per IRS
In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;
|As property. Property is subject to gains and losses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is short-term or long-term.|
|As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Virtual currency income received as an independent contractor has self-employment tax rules applied and must follow Form 1099 reporting requirements.|
|A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.|
|Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.|
|Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a taxable event.|
As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.
Check your Credit
As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of things to consider;
|Shred confidential information before tossing it|
|Do not share logins and passwords|
|Create separate credit card and banking accounts for internet transactions|
|Consider using a PO Box for mail|
|FREE credit report. Each year you are entitled to receive a FREE credit report from the major credit report companies. To receive yours go to: AnnualCreditReport.com|
|IRS Identity Theft: Tips for taxpayers|
|Federal Trade Commission: Identity theft help|
As always, should you have any questions or concerns regarding your situation please feel free to call.