Year-End Tax Planning and 2014 Tax Law Changes

As noted on the “About” page, one of the purposes of this blog is to offer tax savings strategies. As each calendar year nears it’s close, we work with our clients to implement various strategies to reduce their taxes for the year (or in some cases increase them for the purpose of reducing them even more in the following year).  The strategies summarized below comprise the general rules for reducing income taxes year to year and should be considered throughout the year.

The general rule of tax planning is to defer income to the next year and accelerate deductions into the current year unless you expect to be in a higher tax bracket next year, or expect to be subject to the alternative minimum tax (AMT) this year and not next year.  AMT will generally apply if you have significant capital gains and/or a large amount of taxes and miscellaneous itemized deductions (employee business expenses, investment expenses, legal fees, etc.).  The other goal of planning is to ensure maximum benefit of deductions that have limits based on income through a technique called bunching.  It is generally helpful to use your 2013 income tax return to project your taxable income for 2014 by adjusting the 2013 items for expected changes in 2014.

There were significant changes to the tax law beginning with the 2013 tax year including: increases in the top tax rates to 39.6 percent, a new top capital gain tax rate of 20 percent, new Obamacare taxes including the 0.9 percent tax on wages received in excess of the threshold amount and the 3.8 percent tax on unearned income for taxpayers with income over a threshold amount, and a reduction in Personal Exemptions and Itemized Deductions for certain High-Income Taxpayers. Although the changes for the 2014 tax year are not as many, there are a few significant tax law changes beginning for the 2014 tax year. See following for these and other current law changes.

Income Deferral/Acceleration Techniques:

  1. businesses generally have some leeway in the timing of billings/collections and the payment of expenses between 2014 and 2015; accordingly, there is some flexibility in managing 2014 business income;
  2. business owners can time year-end purchases of office equipment and other business property to take full advantage of the section 179 and bonus depreciation write-offs (see below for law changes);
  3. harvest gains or losses from your investment portfolio;
  4. if you own a traditional IRA or a SEP IRA, consider converting it into a Roth IRA and recognizing the conversion income this year;
  5. if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable;
  6. retirement plan contributions can be maximized or distributions of income can be taken when applicable;
  7. accelerate or postpone year-end
      1. charitable contributions;
      2. state income tax installments and/or balances;
      3. property tax payments; and
      4. medical and dental expense payments.

 Bunching

  1. since medical expenses are deductible only to the extent that they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into either 2014 or 2015 may help overcome this threshold;
  2. likewise, miscellaneous itemized deductions, such as employee business expenses, investment advisor fees and certain legal fees, can be bunched into either 2014 or 2015 so as to exceed applicable deduction floors.

Select Tax Law Changes for 2014

  1. Obamacare Health Insurance Requirement – for tax year 2014 tax year, most individual taxpayers will be required to obtain health insurance, either through their employer or independently on a health insurance exchange marketplace, or risk facing a tax penalty. In 2014 the penalty is either $95 per adult ($47.50 per child) or 1% of income up to $285 per family, whichever is higher. These penalties will increase in 2015. If you or your family members do not have health insurance, it may make sense for us to evaluate your options by comparing the amount of the potential penalties with the cost of obtaining coverage.
  2. Section 179 Expensing Deduction – one of the biggest deductions available to all businesses has been dramatically reduced for 2014. For tax years beginning after 2013, the maximum amount that may be expensed has dropped to $25,000 and this amount is reduced where the taxpayer place into service more than $200,000 of Section 179 property.
  3. Bonus Depreciation – unless Congress passes an extension the bonus depreciation provisions will expire for tax years after 2013. Under the bonus depreciation provisions, taxpayers could elect to claim a special (generally 50%) additional depreciation allowance to recover part of the cost of certain qualified property placed in service during the tax year.
  4. Other Expiring Provisions – again unless Congress is able to pass a tax extenders bill, the following are a few of the tax provisions that will expire: Research Tax Credit,  deduction for mortgage insurance premiums, deduction for state and local sales taxes.

 

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