Year End tax planning Checklist

TERRENCE RICE, CPA
309 N. WATER ST.
MILWAUKEE, WI.  53202
414-277-7789
Terry7131@gmail.com


YEAR END TAX PLANNING CHECKLIST

As 2013 winds down, it is once again time to think about year-end tax planning. Similar to 2012, year-end planning will have its challenges as several key tax breaks were extended only through 2013. With a debt ceiling debate taking center stage in Congress, it is unclear whether many of these tax breaks will be extended to 2014 and beyond. We do know that for 2013 individual tax rates are higher than last year, and new taxes, such as the 3.8% Medicare surtax on net investment income, will require special attention.

Year-End Moves for Individuals
Following is a checklist of several tax planning actions that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.
These are just some of the year-end steps that can be taken to save taxes. Contact us and we can tailor a specific plan that will work best for you.

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. The maximum contribution to a health FSA is $2,500.
• If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.
• Consider realizing losses on the sale of stock to offset other large capital gains (from the sale of stock, sale of a principal residence in excess of the exclusion amount, sale of investment property, etc.) to minimize the burden of the 3.8% tax on net investment income, assuming your adjusted gross income is in excess of $200,000 ($250,000 if married filing joint). This is especially important if your taxable income exceeds $400,000 ($450,000 married filing joint), as the long-term capital gain rate increases from 15% to 20% for those individuals.
• Give appreciated stock as a charitable contribution. The value of your donation is the fair market value of the stock on the date of the contribution, and you will not have to pay any tax on the appreciation of the stock. This will also prevent the gain from being subject to the 3.8% tax on net investment income.
• Starting this year, taxpayers whose modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 married filing joint) are subject to a 3.8% tax on the lesser of 1) their net investment income, or 2) the amount by which their MAGI exceeds the threshold. Net investment income includes taxable interest, dividends, and capital gains, as well as passive income, such as income from rental activities that do not constitute a trade or business. We can assist with strategies to minimize or eliminate this additional tax.
• Consider making contributions to Roth IRAs instead of traditional IRAs. Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made 1) after a five-year period, and 2) on or after attaining age 59½, after death or disability, or for a first-time home purchase.
• Take required minimum distributions (RMDs) from your IRA, 401(k) plan or other employer-sponsored retirement plan if you have reached age 70½. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn.
• If you are 70½ or older, consider making charitable contributions (up to $100,000) directly from your IRA. While the contribution won’t be deductible, it will go towards satisfying your RMD even though it won’t be considered taxable income. This is one of the key tax breaks that expire on 12/31/13.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If your adjusted gross income (AGI) will be in excess of $300,000, determine to what extent paying state and local income taxes, as well as making any large year-end charitable contributions, will be adversely impacted by the return of itemized deduction phaseouts in 2013. This should especially be considered if your 2014 income is expected to be lower than 2013.
• Increase your withholding if you are facing a penalty for underpayment of federal estimated tax.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding or make estimated tax payments before year-end to pull the deduction of those taxes into 2013. Watch out for the alternative minimum tax (AMT) and consider itemized deduction phaseouts, as mentioned above.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals.

Year-End Moves for Business Owners

• Ensure that your business is up to date on the provisions of the Affordable Care Act (commonly referred to as “Obamacare”) and understands its obligations to either provide qualifying health coverage or pay a penalty (if a large employer), or at least comply with the required notifications to employees. Although the large employer mandate was delayed until 2015, advanced preparation will make the process more efficient. Contact us for further information on this topic.
• If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans, which ranges from $2,400 to $9,600, won’t be available for post-2013 hires.
• Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after 2013.


• Acquire and place in service business equipment and machinery qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2013 is $500,000. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2013 exceeds $2,000,000 (the investment ceiling). For tax years beginning in 2014, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000.
• Place qualified leasehold improvements in service before the end of the year to take advantage of the 15-year recovery period currently available for these assets. After 2013, most leasehold improvements will have a 39-year recovery period, precluding the taxpayer from being able to immediately expense the property or take bonus depreciation.
• If you are in the market for a business car, consider buying in 2013 an SUV built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight. Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost of the heavy SUV this year. Next year, the write-off rules may not be as generous.
• Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.
• Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this or prior years. Partnership and S corporation losses are deductible only to the extent of your basis in the entity.