As 2014 approaches, many focus on year-end tax planning strategies to reduce the taxes they’ll owe in April. This year many will find themselves paying more, so proper planning is even more critical. Let’s look at some strategies to consider.
For Individuals
Most taxpayers will find their ordinary 2013 income tax rate similar to 2012’s. However, for those with taxable income exceeding $400,000 for single filers ($450,000 if married filing jointly), the top rate will increase to 39.6 percent. Furthermore, the phaseout of itemized deductions is back.
To potentially reduce your tax exposure:
- Time the payment of expenses to make the most of your deductions.
- Pay your fourth-quarter estimated state tax or real-estate property tax in December 2013 or January 2014—whichever year provides the greatest benefit.
- If you’re planning large donations, evaluate when to make the contribution in order to receive the best deduction. Additionally, review whether other charitable planning mechanisms, such as a charitable remainder trust or donor advised fund can provide additional benefit.
Many taxpayers will be subject to the net investment income tax (NIIT) and additional Medicare tax. The NIIT adds a 3.8 percent tax on the lesser of net investment income or the amount that a taxpayer’s modified adjusted gross income exceeds $200,000 for single filers ($250,000 if married filing jointly). The 0.9 percent Medicare tax applies to FICA wages and self-employment income exceeding that same threshold.
The capital gains and dividends tax rate has also increased to 20 percent (23.8 percent with NIIT) for individuals whose taxable income exceeds $400,000 for single filers ($450,000 if married filing jointly).
To potentially reduce your exposure:
- Work with your tax adviser to evaluate your participation in business and rental activities. The NIIT applies only to income classified as “passive,” so to the extent that you materially participate in the activity, you may be able to reduce your tax exposure.
- Use like-kind exchanges or sell assets on the installment method to defer gains.
- If you’re 70 1/2 or older, make a charitable distribution from your IRA to reduce your taxable income.
- Gift income-producing assets to your children.
- If you’re an LLC member or business owner with self-employment income, elect to be taxed as an S corporation. S corporation income isn’t considered net investment income.
- Realize losses in investment portfolios.
- Donate appreciated property (i.e. stock) to get a charitable deduction. This strategy allows for a deduction at the property’s fair market value while avoiding the capital gains tax and the NIIT.
For Businesses
In 2013, the maximum Section 179 depreciation deduction is $500,000 and begins to phase out when assets placed in service during the year exceed $2 million. Up to $250,000 of Section 179 expenses may apply to real property purchases. Effective in 2014, the Section 179 deduction reverts to only $25,000, with the real property provision expiring completely.
Additionally, bonus depreciation of 50 percent of a qualifying asset’s cost can be deducted—a provision that expires at the end of 2013. Leasehold improvements may be depreciated over 15 years (in 2014 this increases to 39 years), and may also be eligible for Section 179 expensing or bonus depreciation.
In light of these dramatic changes, note the timing of your significant asset purchases (and when assets are actually placed in service).
Think Ahead
While it’s tempting to put off tax planning, now is the time to act. You can still implement many of these strategies before the year’s end to impact your tax bill. Consult a tax professional to best implement these strategies and achieve results that fit with your overall financial goals.
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