2014–15 tax guide: Income taxes

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Business owners and executives are trained to put their businesses first, but tax planning should always start at the individual level. No matter where your business or employment income is earned, it will eventually be taxed on an individual return. Your individual income is taxed at different rates and in different ways depending on the type of income. The key to tax planning is to understand how your various streams of income will be treated.

Ordinary income includes items like salary, wages, bonuses, self-employment income, interest and retirement plan distributions. The tax rates on ordinary income rise as your income increases. These tax brackets received only modest bumps for 2015, because the IRS used an approximate inflation rate of just 1.7% to make its annual adjustments.

Investment income
With income rolling in and taxes sky-high, tax planning on your investment income is especially crucial. Where do you start? First, you need to understand how different investment income is taxed. Investment income such as rents, royalties, interest and short-term capital gains is taxed as ordinary income. Qualified dividends and capital gains from the sale of property held more than a year are taxed at preferential rates. These rates can make owning stock or a business interest a rewarding investment.

Long-term capital gains and qualified dividends

This does not include 3.8% Medicare tax on net investment income.
Income amounts refer to taxpayer total taxable income including ordinary income.

Looking beyond the tax brackets
The tax code is loaded with special provisions that, with careful planning, can lower your tax burden. Many of these benefits, like the standard deduction and personal exemption, were adjusted very modestly this year. Unfortunately, many targeted benefits that lawmakers have added to the tax code are designed to phase out at upper income levels. It’s important to understand how these phaseouts will affect your tax bill so you can plan accordingly and pay enough in estimated and withholding taxes.

Planning tip: Bunch itemized deductions
Timing significantly affects your itemized deductions, because many of those deductions have adjusted gross income (AGI) floors. For instance, miscellaneous expenses are deductible only to the extent they exceed 2% of your AGI, and medical expenses are deductible only to the extent they exceed 10% of your AGI (7.5% for taxpayers 65 and older). Bunching these deductions into a single year may allow you to exceed these floors and save. Miscellaneous expenses you may be able to accelerate and pay now include:

  • Deductible investment expenses such as investment advisory fees, custodial fees, safe deposit box rentals and investment publications
  • Professional fees such as tax planning and preparation, accounting and certain legal fees
  • Unreimbursed employee business expenses such as travel, meals, entertainment, vehicle costs and publications — all exclusive of personal use
Bunching medical expenses is often easier than bunching miscellaneous itemized deductions. Consider scheduling your nonurgent medical procedures and other controllable expenses in one year to take advantage of the deductions. Deductible medical expenses include:
  • Health insurance premiums
  • Medical and dental costs and services, including elective surgical procedures that are not purely cosmetic

General tax benefits

Tax reference guide
Tax reference guide

David Walser
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Dustin Stamper
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