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Looking Back Before Moving Forward: Post Filing-Season Check-up for 2014 Tax Savings

May 19, 2014

Bruce A. Desrosiers, CPA, MST

"Those who fail to learn the lessons of history are doomed to repeat them"¹ sounds fairly ominous but often becomes true at tax time. However, now is the time to learn the lessons from last year’s tax return that can make a difference in your 2014 filing situation.

Looking back at the things you could have done last year to save money on your personal tax return and planning for 2014 can help to ensure opportunities for tax savings are not missed. For example, there are many opportunities to exclude compensation from taxable income. What programs are available through your employer? Are you making the best of the programs?

Here’s a short list of items that could have made a difference and have an impact on next year’s return:

401(k) Plans

The biggest missed opportunity is not sufficiently funding your company’s 401(k) plan to take advantage of any matching contributions. Find out what your employer will match, and take the free money at a minimum. This benefits you three different ways:

  1. The money you put in is not taxable as wages on your tax return.
  2. The matching contribution from your employer is (or will be) your money and is also not currently taxable.
  3. All earnings on your account are tax free until you withdraw funds when you retire. The maximum contribution level for 2013 was $17,500 ($23,000 over age 50).

FSAs and HSAs

Some employers have plans that allow you to use pre-tax money to fund medical expenses or daycare costs. The “Flexible Spending Arrangement” (FSA) consists of two distinct types allowing you to put pre-tax earnings into an account to pay either for qualified medical expenses or for the cost of child care. The Healthcare FSA has a contribution limit of $2,500, and the Childcare FSA has a contribution limit of $5,000 per year. The FSA is a “use it or lose it” account, so you must generally use all the funds in the account during the year (starting in 2013 $500 can be carried over to the following year). Keep in mind that when you use a pre-tax account correctly, you get the same benefit as a deduction for the same item because the compensation is not taxed in the first place.

HSA’s or Health Savings Accounts are available when an employer offers a High Deductible Health Plan. The account can be funded by employer contributions or employee contributions through a cafeteria plan, both of which are not included in your income. Contributions to the account outside of the employment context would result in a deduction when you file your tax return. The contribution limits are $3,250 and $6,450 for self-only and family plans, respectively. People who are over age 55 at the end of the year can contribute $1,000 more. Distributions from the plan including any earnings are tax free if used for qualified medical expenses. Unused balances in the plan are portable and can be carried over from year to year. Contributions to the plan after age 65 are not allowed.

Investment Income

The investment choices you make may have a direct impact on your tax bill. Interest rates have been extraordinarily low for several years. The interest you earn on bank accounts or CDs is taxable to you at ordinary income rates. The dividends you earn from stock or mutual fund investments that are qualified dividends are taxed as if they were capital gains. If you are married and your taxable income was under $72,500 in 2013, then any qualified dividends or long term capital gains were not taxed at all on your federal income tax return. If your income was higher than $72,500 but not more than $450,000, your maximum federal tax rate would have been 15%, which is a much better rate than the rates on regular interest income (25-35% until you reach $450,000 of taxable income).

Premature Distributions from Retirement Accounts

Life happens to everyone and sometimes you are faced with a need for cash to meet a current need. Taking money from a retirement account can be one of the most expensive income tax mistakes you can make if it is done before age 59 ½. The distributions themselves are usually taxable, and if they are taken before you are 59 ½ they will also cost you an additional10% in penalties. Consider a savings strategy that gives you access to cash outside of retirement account assets. Perhaps a home equity loan or even a loan from your 401(k) plan would be better choices.

Contributions to Charity

We live in a generous nation and there are many causes with which you can align yourself. Failing to properly document your contributions with checks, credit card statements, acknowledgement letters or receipts can lead to your not knowing how much you really contributed. Without this knowledge and the evidence to support it, the potential contribution is lost. You must have a dated receipt or record at the time of your contribution if the amount is less than $250. When the amount is $250 or more, you must have an acknowledgement from the organization when contributing property such as household items and clothing that you have had for more than a year. You need to document the type and condition of the property and donate it to a “qualified charity.” You are responsible for determining the value of your contribution and for getting a dated receipt for your contribution. Organizations that state a portion of their proceeds are donated to another organization are not usually within the IRS’s definition of a qualified charity. The receipt will show the organization is a 501(c)(3) charitable organization.

If you volunteer your time and incur costs to volunteer for a charity, your costs, including mileage, may result in additional deductions. Keep records of your travel and other costs incurred and, if necessary, ask the charity to acknowledge your contribution in writing. Charitable mileage rate in 2013 was .14 cents per mile.

Overpayments and Balance Due Situations

Discovering that you have a large balance due with your return can be a stressful event if you were not expecting it. Having a large overpayment is more pleasant but could be a sign of over-withholdings. Fixing an over-withholding issue is easily solved by filing a new W-4 with your employer.

The IRS expects that you will pay your taxes evenly throughout the year as you earn income. There is an interest charge that is calculated if you miss the minimum required payments. The most common payment method is wage withholdings. Taxpayers with income from other sources such as stock sales, a business sale, unemployment compensation or lottery win, should consider the need to make estimated tax payments in addition to withholdings. When you typically have income from other sources every year, estimated tax payments would be advised using your prior year filing as a basis for making estimated tax payments. When your income goes up or down dramatically, an adjustment may need to be made to your estimate; this is usually done by projecting your current year taxes based on your change in income. The secret is to pay only what is required when it is required, to avoid interest charges and April 15th surprises.

You can learn from the past by looking in the rear view mirror, but do not forget to watch where you are going. Tax law changes happen every year. Here are some things to watch out for in 2014:

  • Individual insurance requirements take effect requiring that most people be covered by medical insurance or pay penalties.
  • MyRA accounts will be introduced later this year as a new way to start saving for retirement.
  • Tax extenders are needed for popular tax benefits for individuals and businesses. Will Congress make these changes in time to help you in 2014?
  • This year, foreign accounts reporting must be done electronically by June 30, 2014 for the calendar year 2013. FinCEN Form 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the BSA E-Filing System website.

For more information, please contact Bruce Desrosiers at or 401.330.2743.

¹George Santayana

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.


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