A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.

Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2015 phaseout range is $183,000–$193,000.
• For single and head-of-household taxpayers, the 2015 phaseout range is $116,000–$131,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

If the income-based phaseout prevents you from making Roth IRA contributions and you don’talready have a traditional IRA, a “back door” IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.

Even though portability now allows married couples to use up both spouses’ estate tax exemptions without having to make lifetime asset transfers or set up trusts, this “easier” path isn’t necessarily the better path. For couples with large estates, making lifetime asset transfers and setting up trusts can provide benefits that exemption portability doesn’t offer.

With portability, if one spouse dies and part (or all) of his or her estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption. But making the portability election doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does.

Also, the portability provision doesn’t apply to the GST tax exemption, and some states don’t recognize exemption portability. Credit shelter trusts offer GST and state estate tax planning opportunities, as well as creditor and remarriage protection.

If you’d like to learn more about credit shelter trusts or other estate planning strategies for your situation, please let us know.

If you don’t pay attention to the details, the tax consequences of a sale may be different from what you expect. For example, if you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

And when it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.

Finally, consider the transaction costs, such as broker fees. While of course such costs aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.

If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.

If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes.

And the employee might be subject to double taxation if both states attempt to tax his or her income — the recent Supreme Court ruling in Comptroller of the State of Maryland v. Wynne addressed a similar issue, although in that case the taxpayers weren’t telecommuters but owners of an S corporation that earned income in other states.

The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement. If you’re considering hiring employees to telecommute from outside your state, we can help you assess the potential tax impact.

If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. You can deduct the vehicle’s fair market value (FMV) if the charity:

• Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly),
• Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or
• Makes “material improvements” to the vehicle.

But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.

You also must obtain proper substantiation from the charity, including a written acknowledgment that:

• Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose,
• Includes your name and tax identification number and the vehicle identification number, and
• Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale.

For more information on these and other rules that apply to vehicle donation deductions, please contact us.

As the school year draws to a close, it’s a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if you have young children.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Here are some other key ESA benefits:

• Although contributions aren’t deductible, plan assets can grow tax-deferred.
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.

The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!

Generally, businesses are limited to deducting 50% of allowable meal and entertainment (M&E) expenses. But certain expenses are 100% deductible, including expenses:

• For food and beverages furnished at the workplace primarily for employees,
• Treated as employee compensation,
• That are excludable from employees’ income as de minimis fringe benefits,
• For recreational or social activities for employees, such as holiday parties, or
• Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services.

If your company has substantial M&E expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of M&E expenses that are fully deductible. For more information on how to take advantage of the 100% deduction, please contact us.

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for.

ISOs must comply with many rules but receive tax-favored treatment:

• You owe no tax when ISOs are granted.
• You owe no regular income tax when you exercise ISOs.
• If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax.
• If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

There also might be alternative minimum tax consequences in certain situations. If you’ve received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.

Whether you filed your 2014 income tax return by the April 15 deadline or filed for an extension, you may think that it’s a good time to take a break from thinking about taxes. But doing so could be costly. Now is actually the time you should begin your 2015 tax planning — if you haven’t already.

A tremendous number of variables affect your overall tax liability for the year, and starting to look at these variables early in the year can give you more opportunities to reduce your 2015 tax bill. For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year end activity. To get started on your 2015 tax planning, contact us. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.

The additional 0.9% Medicare tax applies to FICA wages and self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). Unfortunately, the withholding rules have been tripping up some taxpayers, causing them to face an unexpected tax bill — plus interest and penalties — when they file their returns.

Employers must withhold the additional tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So if your wages don’t exceed $200,000, your employer won’t withhold the tax — even if you’re liable for it. This might occur because you and your spouse’s combined wages exceed the $250,000 threshold for joint filers or because you have wages from a second job or have self-employment income.

If you expect to be in the same situation in 2015, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments. If you have questions about the additional 0.9% Medicare tax, please contact us.