The Internal Revenue Service announced plans to open the 2014 filing season on Jan. 31.
The new opening date for individuals to file their 2013 tax returns will allow the IRS adequate time to program and test its tax processing systems. The annual process for updating IRS systems saw significant delays in October following the 16-day federal government closure.
“Our teams have been working hard throughout the fall to prepare for the upcoming tax season,” IRS Acting Commissioner Danny Werfel said. “The late January opening gives us enough time to get things right with our programming, testing and systems validation. It’s a complex process, and our bottom-line goal is to provide a smooth filing and refund process for the nation’s taxpayers.”
The government closure meant the IRS had to change the original opening date from Jan. 21 to Jan. 31, 2014. The 2014 date is one day later than the 2013 filing season opening, which started on Jan. 30, 2013 following January tax law changes made by Congress on Jan. 1 under the American Taxpayer Relief Act (ATRA). The extensive set of ATRA tax changes affected many 2012 tax returns, which led to the late January opening.
The IRS noted that several options are available to help taxpayers prepare for the 2014 tax season and get their refunds as easily as possible. New year-end tax planning information has been added to IRS.gov this week.
In addition, many software companies are expected to begin accepting tax returns in January and hold those returns until the IRS systems open on Jan. 31. More details will be available in January.
The IRS cautioned that it will not process any tax returns before Jan. 31, so there is no advantage to filing on paper before the opening date. Taxpayers will receive their tax refunds much faster by using e-file or Free File with the direct deposit option.
The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.
IRS systems, applications and databases must be updated annually to reflect tax law updates, business process changes and programming updates in time for the start of the filing season.
The October closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.
About 90 percent of IRS operations were closed during the shutdown, with some major work streams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.
Friday, January 3, 2014
Thursday, January 2, 2014
How to catch up on retirement savings
FROM MARKETWATCH.COM
If you’re age 50 or older, you can make extra “catch-up” contributions to certain types of tax-favored retirement accounts. Many people fail to capitalize on this opportunity because they don’t realize that making these extra contributions can make a significant difference in their retirement-age wealth. Here’s the proof.
Catch-Up Contribution Basics
Assuming your company retirement plan allows them, you can make extra salary-reduction contributions to your 401(k), 403(b), or 457 account starting with the year you turn age 50. Salary reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction for making them. If your state has a personal income tax, you’ll generally get a state tax deduction too. You can use the resulting tax savings to help pay for part of your catch-up contribution, or you can set them aside in a taxable retirement savings account to further increase your retirement-age wealth. Either way, it’s all good.
You can also make extra catch-up contributions to your traditional or Roth IRA. If you’re 50 or older as of Dec. 31, 2013, you can make a catch-up contribution for the 2013 tax year and you have until April 15, 2014, to get it done. Contributions to deductible IRAs create tax savings, but your income may be too high to qualify. Contributions to Roth IRAs don’t generate any up-front tax savings, but you can take tax-free withdrawals after age 59½ (assuming you’ve had at least one Roth account open for over five years). There are income restrictions on Roth contributions too. Worst case, you can make extra nondeductible traditional IRA contributions and benefit from the account’s tax-deferred earnings advantage. Remember: You have until April 15 to make IRA catch-up contributions for the 2013 tax year.
Maximum catch-up contributions for both the 2013 and 2014 tax years are as follows.
401(k), 403(b) and 457 Plans: $5,500
Traditional and Roth IRAs: $1,000
How Much Extra Could You Accumulate?
Quite a bit, because maximum catch-up contributions are considerably larger than when they were first introduced a few years ago. For example, in 2002 the maximum catch-up contribution to a 401(k) account was only $1,000 versus $5,500 now. The maximum catch-up contribution to a traditional or Roth IRA was only $500 versus $1,000 now. Let me give you some numbers to help quantify how much extra retirement-age wealth you could pile up by making catch-up contributions.
Impact of Salary Reduction Catch-Up Contributions
Say you turn 50 this year and contribute an extra $5,500 for 2013. Then you do the same for the following 15 years, through age 65. Here’s how much extra you could accumulate by age 65 in your 401(k), 403(b), or 457 plan (rounded to the nearest $1,000).
4% Annual Return: $120,000
6% Annual Return: $141,000
8% Annual Return: $167,000
Remember: Making larger contributions can also lower your tax bills
Once again, say you turn 50 during 2013 and contribute an extra $1,000 for this year and then do the same for the next 15 years, through age 65. Here’s how much extra you could accumulate in your IRA by age 65 (rounded to the nearest $1,000).
4% Annual Return: $22,000
6% Annual Return: $26,000
8% Annual Return: $30,000
Remember: Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional contributions to a Roth IRA won’t, but you can make tax-free withdrawals later in life.
Impact of Salary Reduction Plus IRA Catch-Up Contributions
Finally, let’s say you turn 50 during 2013 and make an extra $5,500 salary reduction catch-up contribution for this year plus an extra $1,000 IRA contribution. Then you do the same for the following 15 years, through age 65. Here’s how much extra you could accumulate by age 65 in the two accounts together (rounded to the nearest $1,000).
4% Annual Return: $142,000
6% Annual Return: $167,000
8% Annual Return: $197,000
The Bottom Line
As you can see, extra catch-up contributions can potentially add up to some pretty big numbers by the time you reach retirement age. If your spouse is able to make catch-up contributions too, you can double all the amounts shown here. This is something to think about, especially if you have doubts about whether Social Security will be there for you when you need it.
If you’re age 50 or older, you can make extra “catch-up” contributions to certain types of tax-favored retirement accounts. Many people fail to capitalize on this opportunity because they don’t realize that making these extra contributions can make a significant difference in their retirement-age wealth. Here’s the proof.
Catch-Up Contribution Basics
Assuming your company retirement plan allows them, you can make extra salary-reduction contributions to your 401(k), 403(b), or 457 account starting with the year you turn age 50. Salary reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction for making them. If your state has a personal income tax, you’ll generally get a state tax deduction too. You can use the resulting tax savings to help pay for part of your catch-up contribution, or you can set them aside in a taxable retirement savings account to further increase your retirement-age wealth. Either way, it’s all good.
You can also make extra catch-up contributions to your traditional or Roth IRA. If you’re 50 or older as of Dec. 31, 2013, you can make a catch-up contribution for the 2013 tax year and you have until April 15, 2014, to get it done. Contributions to deductible IRAs create tax savings, but your income may be too high to qualify. Contributions to Roth IRAs don’t generate any up-front tax savings, but you can take tax-free withdrawals after age 59½ (assuming you’ve had at least one Roth account open for over five years). There are income restrictions on Roth contributions too. Worst case, you can make extra nondeductible traditional IRA contributions and benefit from the account’s tax-deferred earnings advantage. Remember: You have until April 15 to make IRA catch-up contributions for the 2013 tax year.
Maximum catch-up contributions for both the 2013 and 2014 tax years are as follows.
401(k), 403(b) and 457 Plans: $5,500
Traditional and Roth IRAs: $1,000
How Much Extra Could You Accumulate?
Quite a bit, because maximum catch-up contributions are considerably larger than when they were first introduced a few years ago. For example, in 2002 the maximum catch-up contribution to a 401(k) account was only $1,000 versus $5,500 now. The maximum catch-up contribution to a traditional or Roth IRA was only $500 versus $1,000 now. Let me give you some numbers to help quantify how much extra retirement-age wealth you could pile up by making catch-up contributions.
Impact of Salary Reduction Catch-Up Contributions
Say you turn 50 this year and contribute an extra $5,500 for 2013. Then you do the same for the following 15 years, through age 65. Here’s how much extra you could accumulate by age 65 in your 401(k), 403(b), or 457 plan (rounded to the nearest $1,000).
4% Annual Return: $120,000
6% Annual Return: $141,000
8% Annual Return: $167,000
Remember: Making larger contributions can also lower your tax bills
Once again, say you turn 50 during 2013 and contribute an extra $1,000 for this year and then do the same for the next 15 years, through age 65. Here’s how much extra you could accumulate in your IRA by age 65 (rounded to the nearest $1,000).
4% Annual Return: $22,000
6% Annual Return: $26,000
8% Annual Return: $30,000
Remember: Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional contributions to a Roth IRA won’t, but you can make tax-free withdrawals later in life.
Impact of Salary Reduction Plus IRA Catch-Up Contributions
Finally, let’s say you turn 50 during 2013 and make an extra $5,500 salary reduction catch-up contribution for this year plus an extra $1,000 IRA contribution. Then you do the same for the following 15 years, through age 65. Here’s how much extra you could accumulate by age 65 in the two accounts together (rounded to the nearest $1,000).
4% Annual Return: $142,000
6% Annual Return: $167,000
8% Annual Return: $197,000
The Bottom Line
As you can see, extra catch-up contributions can potentially add up to some pretty big numbers by the time you reach retirement age. If your spouse is able to make catch-up contributions too, you can double all the amounts shown here. This is something to think about, especially if you have doubts about whether Social Security will be there for you when you need it.
Wednesday, January 1, 2014
Getting a jumpstart on 2014 tax planning
It's probably too late to do any significant planning for the 2013 tax year, but right now is the perfect time to get a jumpstart on 2014.
Tax gurus note that the top earners — singles with taxable income over $400,000 and married joint filers with income over $450,000 — will be in for a nasty surprise when they confront the 2013 federal tax bills they'll pay in April. They face a top marginal income tax rate of 39.6% and a top marginal tax rate of 20% on long-term capital gains.
The American Taxpayer Relief Act of 2012, enacted close to a year ago, put in place the net investment income tax of 3.8% on annuity income, royalties, dividends and other sources of investment income, as well as the additional Medicare tax of 0.9%. Those levies will affect individuals making upward of $200,000 in modified adjusted gross income and married joint filers with over $250,000 in income.
There have also been phaseouts on personal exemptions and itemized deductions: The so-called PEP and Pease.
It's all the more reason to start laying the groundwork for 2014.
First and foremost, there's the net investment income tax: the 3.8% levy that applies to the amount by which the taxpayer's modified adjusted gross income exceeds $200,000 (if single) or the taxpayer's net investment income — whichever is lesser.
Kick off the new year by looking at portfolio holdings. Advisers should aim to reduce turnover and look into using statutory shelters, such as life insurance, real estate and master limited partnerships to minimize the tax hit.
Roth conversions will still be in vogue during the 2013 tax season. These conversions require an upfront tax payment, but income from the Roth IRA will be tax-free in the future. In fact, jumping on that conversion right away makes sense because the client is maximizing the amount of time for the market to do its work. You have until Oct. 15, 2015, to undo the Roth conversion, which means the client has a year and ten months to watch the market.
High-net-worth clients who make significant charitable donations may want to consider front-loading a donor-advised fund in the new year. Given the new steep capital gains taxes and the fact that the market appreciated considerably over the course of last year, making a sizable gift of appreciated stock in January will give the client a considerable charitable deduction.
“Let's say you give $5,000 a year to a charity and you have a stock position with a basis of $25,000 — but it's now worth $50,000 because of the appreciation over the last two years,” said Mr. Rice. “If you put in the $50,000 in appreciated stock into a donor-advised fund, you're frontloading it for the next 10 years, and you have a nice income tax deduction that you can use today.”
Finally, certain high earners might want to manage their income stream in order to keep themselves from drifting into higher tax brackets. If someone gets paid in stock options, perhaps they can defer them into later years when their income won't be as high. This might make sense if the individual projects that he or she will have a big income year and can have control over when and how that income is received.
“These clients might be getting close to retirement and don't want to trigger all this income at the same time, so they're looking for ways to defer income and stay below their thresholds,” Mr. Rice added.
Tax gurus note that the top earners — singles with taxable income over $400,000 and married joint filers with income over $450,000 — will be in for a nasty surprise when they confront the 2013 federal tax bills they'll pay in April. They face a top marginal income tax rate of 39.6% and a top marginal tax rate of 20% on long-term capital gains.
The American Taxpayer Relief Act of 2012, enacted close to a year ago, put in place the net investment income tax of 3.8% on annuity income, royalties, dividends and other sources of investment income, as well as the additional Medicare tax of 0.9%. Those levies will affect individuals making upward of $200,000 in modified adjusted gross income and married joint filers with over $250,000 in income.
There have also been phaseouts on personal exemptions and itemized deductions: The so-called PEP and Pease.
It's all the more reason to start laying the groundwork for 2014.
First and foremost, there's the net investment income tax: the 3.8% levy that applies to the amount by which the taxpayer's modified adjusted gross income exceeds $200,000 (if single) or the taxpayer's net investment income — whichever is lesser.
Kick off the new year by looking at portfolio holdings. Advisers should aim to reduce turnover and look into using statutory shelters, such as life insurance, real estate and master limited partnerships to minimize the tax hit.
Roth conversions will still be in vogue during the 2013 tax season. These conversions require an upfront tax payment, but income from the Roth IRA will be tax-free in the future. In fact, jumping on that conversion right away makes sense because the client is maximizing the amount of time for the market to do its work. You have until Oct. 15, 2015, to undo the Roth conversion, which means the client has a year and ten months to watch the market.
High-net-worth clients who make significant charitable donations may want to consider front-loading a donor-advised fund in the new year. Given the new steep capital gains taxes and the fact that the market appreciated considerably over the course of last year, making a sizable gift of appreciated stock in January will give the client a considerable charitable deduction.
“Let's say you give $5,000 a year to a charity and you have a stock position with a basis of $25,000 — but it's now worth $50,000 because of the appreciation over the last two years,” said Mr. Rice. “If you put in the $50,000 in appreciated stock into a donor-advised fund, you're frontloading it for the next 10 years, and you have a nice income tax deduction that you can use today.”
Finally, certain high earners might want to manage their income stream in order to keep themselves from drifting into higher tax brackets. If someone gets paid in stock options, perhaps they can defer them into later years when their income won't be as high. This might make sense if the individual projects that he or she will have a big income year and can have control over when and how that income is received.
“These clients might be getting close to retirement and don't want to trigger all this income at the same time, so they're looking for ways to defer income and stay below their thresholds,” Mr. Rice added.
Saturday, December 28, 2013
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.
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.
Tuesday, December 24, 2013
Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks
The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year. Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.
It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013. If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.
Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.
The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:
1. Accelerating or deferring income/deductions as part of a year-end tax strategy
A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s). (Historical note: For those of you old enough to remember, there was an income averaging rule built into the tax code. That provision has long been abolished.)
So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.
The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:
Selling property
Leasing
Inventory
Compensation and bonus practices
Depreciation and expense elections.
Cash Basis Small Businesses
Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:
Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.) Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).
Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.
Accrual Basis Small Businesses
Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income. Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.
Taking the opposite approach: If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.
2. Tax Break For Small Business Expense Election Under Section 179
ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year. This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.
Warning: Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.
Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.
Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014. Also the qualified leasehold-improvement breaks end at the end of 2013. If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.
Final note: In addition to new property, Section 179 can be applied to used property.
3. Bonus deprecation
ATRA extended this additional first year depreciation allowance into 2013. This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.
Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.
Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.
4. Accelerated Depreciation
ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property. Normally the recovery period for this type of property is 39 years so this is a huge tax break.
5. Increased start-up expense deduction
New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.
6. Repair Regulations
The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.
The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations. For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)). This allows many small businesses to take advantage of these tax breaks.
The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.
Bottom Line: The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor. This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.
7. Compensation arrangements
Timing of Compensation:
In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation. Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income. It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.
Use of Retirement Plans:
Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity. These plans are quite useful when compensation has already reached the highest level of reasonableness.
Important Points:
These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year. These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return. This gives the small business owner some after the taxable year-end planning flexibility.
Additionally and maybe more importantly, when compensation paid to owners is approaching their own:
Highest marginal tax bracket,
3.8% medicare tax threshold. (To learn more please read New 2013 Medicare Tax: 3.8% Stealth Tax),
0.9% medicare tax, or
Itemized deduction and exemption phase outs (To learn more on this and other individual tax planning issues please read 2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes), additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner. This can produce a double benefit: huge income tax savings and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.
Use of 2 ½ Month Bonus Rule:
Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.
Compensation and K-1 Distributions
Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year. For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax. The strategy here would be to pay less in salary and have more income reported on the Form K-1. However, taxpayers can be in trouble here if they get greedy. The IRS is policing this area to make sure that the salary paid is reasonable. Therefore, a reasonable salary must be carefully determined and supportable in a tax audit.
Deferring payments of accrued bonuses
In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.
8. Other Tax Planning Strategies and Ideas
Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:
Accelerating installment sale proceeds or electing out of the installment method;
Elect slower depreciation methods;
Determine if you can write-off any bad debts;
Consider changing your accounting method to advance income or defer expenses. This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
Cost Segregation Study: For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes. It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions. For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions. Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.
Final Thoughts:
The above are not intended as a comprehensive list of year-end tax planning tools for small businesses. The point here is that each business has its own unique tax and business situation. A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.
If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below. I would be glad to help.
For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.
It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013. If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.
Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.
The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:
1. Accelerating or deferring income/deductions as part of a year-end tax strategy
A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s). (Historical note: For those of you old enough to remember, there was an income averaging rule built into the tax code. That provision has long been abolished.)
So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.
The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:
Selling property
Leasing
Inventory
Compensation and bonus practices
Depreciation and expense elections.
Cash Basis Small Businesses
Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:
Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.) Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).
Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.
Accrual Basis Small Businesses
Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income. Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.
Taking the opposite approach: If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.
2. Tax Break For Small Business Expense Election Under Section 179
ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year. This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.
Warning: Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.
Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.
Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014. Also the qualified leasehold-improvement breaks end at the end of 2013. If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.
Final note: In addition to new property, Section 179 can be applied to used property.
3. Bonus deprecation
ATRA extended this additional first year depreciation allowance into 2013. This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.
Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.
Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.
4. Accelerated Depreciation
ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property. Normally the recovery period for this type of property is 39 years so this is a huge tax break.
5. Increased start-up expense deduction
New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.
6. Repair Regulations
The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.
The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations. For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)). This allows many small businesses to take advantage of these tax breaks.
The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.
Bottom Line: The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor. This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.
7. Compensation arrangements
Timing of Compensation:
In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation. Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income. It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.
Use of Retirement Plans:
Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity. These plans are quite useful when compensation has already reached the highest level of reasonableness.
Important Points:
These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year. These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return. This gives the small business owner some after the taxable year-end planning flexibility.
Additionally and maybe more importantly, when compensation paid to owners is approaching their own:
Highest marginal tax bracket,
3.8% medicare tax threshold. (To learn more please read New 2013 Medicare Tax: 3.8% Stealth Tax),
0.9% medicare tax, or
Itemized deduction and exemption phase outs (To learn more on this and other individual tax planning issues please read 2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes), additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner. This can produce a double benefit: huge income tax savings and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.
Use of 2 ½ Month Bonus Rule:
Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.
Compensation and K-1 Distributions
Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year. For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax. The strategy here would be to pay less in salary and have more income reported on the Form K-1. However, taxpayers can be in trouble here if they get greedy. The IRS is policing this area to make sure that the salary paid is reasonable. Therefore, a reasonable salary must be carefully determined and supportable in a tax audit.
Deferring payments of accrued bonuses
In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.
8. Other Tax Planning Strategies and Ideas
Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:
Accelerating installment sale proceeds or electing out of the installment method;
Elect slower depreciation methods;
Determine if you can write-off any bad debts;
Consider changing your accounting method to advance income or defer expenses. This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
Cost Segregation Study: For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes. It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions. For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions. Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.
Final Thoughts:
The above are not intended as a comprehensive list of year-end tax planning tools for small businesses. The point here is that each business has its own unique tax and business situation. A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.
If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below. I would be glad to help.
For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.
Monday, December 23, 2013
Tax increases make year-end planning important for upper-income households
A year ago, it was difficult for taxpayers to do last-minute tax planning because of uncertainty surrounding expiring tax breaks from the Bush era.
Lawmakers were at loggerheads on which, if any, deductions and credits to keep and whether to let tax rates rise.
This year, uncertainty isn't a problem. The American Taxpayer Relief Act, signed into law in January, has left taxes much the same for households with incomes of less than $250,000. And for those with income above that, the tax landscape is clear, too: They will owe Uncle Sam more.
“High-income taxpayers have tax increases coming at them from multiple directions,” said Tim Steffen, director of financial planning at Robert W. Baird in Milwaukee. “It's going to be some real sticker shock for them when they start looking at their tax returns a few months from now.”
Congress raised tax rates on regular income and capital gains for the affluent. It also created a new tax for them on investment income as well as adding an extra Medicare tax on high wages. And the well-off will once more see their itemized deductions reduced as income goes up.
There still is one uncertainty, though, at this late stage: When will the tax season start?
It had been scheduled for Jan. 21. But the government shutdown in October interrupted IRS preparations for the coming season, and the agency now says the launch of the tax season will be no earlier than Jan. 28, but no later than Feb. 4.
For taxpayers, here are some changes to be aware of for the 2013 tax season, as well as some moves to consider that might reduce how much you owe:
»The return of higher rates: The lower tax rates on regular income introduced during the Bush administration remain intact. But the wealthy will see the return of the top tax rate of 39.6 percent, which had disappeared for years. This rate applies to taxable income above $400,000 for singles and $450,000 for married joint filers.
Most people don't fall into this category. But those who do might want to consider shifting more toward nontaxable income, such as tax-exempt bonds, said Mark Luscombe, principal analyst with CCH, an Illinois-based provider of tax information.
Or, if self-employed, taxpayers can try to get below those $400,000 and $450,000 limits by postponing income into next year, such as sending bills to customers early next year, Luscombe said.
Taxpayers in these income thresholds also will see the rate on long-term capital gains go up from 15 percent to 20 percent.
Those in the two bottom tax brackets — 10 and 15 percent — will continue not to be taxed on capital gains. Everyone else remains taxed at a rate of 15 percent.
» Taxes to support health reform: The well-to-do will be kicking in more under two new taxes that were part of the Affordable Care Act, better known as Obamacare.
Workers already pay 1.45 percent of wages for Medicare. But high earners this year started paying an additional 0.9 percent on wages exceeding $200,000 for singles and $250,000 for joint filers.
Taxpayers at those income levels also will be subject to a new 3.8 percent tax on net investment income, which includes dividends, royalties, rents and capital gains.
This tax applies to whichever is less: the amount of net investment income or adjusted gross income over the $200,000 and $250,000 thresholds.
With this 3.8 percent tax plus regular capital gains tax, it's possible that some taxpayers will pay a rate of 18.8 percent or 23.8 percent on investment gains.
It gets complicated.
“At the end of the day, what's happened is it's become very difficult,” said David Rosen, director of tax services at RS&F, an accounting and business consulting firm in Owings Mills, Md. “Where I used to be able to go through a person's situation and figure out in my head what their next-year tax will be, you can't do it without a computer these days.”
» Keep income low: If possible, taxpayers should try to keep their income below the $200,000 or $250,000 threshold to lessen the tax impact of those taxes, Luscombe said.
For instance, they can contribute more pre-tax dollars to a retirement plan. Or instead of converting an entire traditional IRA to a Roth IRA — in which the amount converted is considered income for tax purposes — taxpayers should convert smaller sums over a few years to keep below the threshold, Luscombe said.
Taxpayers age 70½ and older with traditional IRAs can lower their adjusted gross income by making donations directly from the IRA to a charity, Luscombe said. They won't get a charitable deduction, but the distribution doesn't count as income on tax returns like regular required distributions older IRA owners must make annually.
And by lowering adjusted gross income, these taxpayers could avoid triggering the net income investment tax or find themselves eligible for other tax breaks with income limits, he said. This tax break, though, expires at the end of this year.
» Harvesting losses: If you sell securities, you can offset gains with losses on your tax return to minimize the capital gains tax bite. Given the new tax increases, this strategy of taking losses along with gains becomes even more attractive this year, Steffen said.
And when selling securities for a gain, Steffen added, high-income investors should look to jettison investments held for more than a year. Gains on investments held for less time will be taxed as regular income — or as much as 39.6 percent. Along with the 3.8 percent net investment income tax, wealthy investors could see gains taxed at a whopping rate of 43.4 percent.
» Donate stock: The typical tax advice is to make charitable donations before the end of the year to get a deduction. But with the stock market hitting new heights, consider donating appreciated shares. You can deduct the appreciated value of those shares without having to recognize the gain on your tax return.
Be aware, Steffen said, that if you sell shares held one year or less, the most you would be able to deduct is the cost basis — or the amount you paid for the shares.
» Medical deductions: In the past, you could deduct medical expenses that exceeded 7.5 percent of adjusted gross income. Now that threshold is 10 percent for people under age 65.
If possible, plan elective medical procedures within the same year so you have a better chance of meeting that new limit, Luscombe said.
» Health insurance: The deadline to buy a health insurance policy on government exchanges has been extended to Dec. 23 for those who want coverage to start on Jan. 1.
Taxpayers without coverage next year will have to pay a penalty. The IRS has the ability to enforce it — offsetting the penalty against current or future refunds — but can't file a lien or levy to collect it, Luscombe said.
» Expiration of tax cuts: Several tax breaks are set to expire at the end of this year — although Congress in the past has extended them.
“If we ever get a serious proposal for serious tax reform,” some of these tax breaks might go away in exchange for lower income-tax rates, Luscombe said.
One of them, for instance, is the ability to deduct state and local sales taxes on the federal return instead of state and local income taxes, he said. Taxpayers who believe reform could happen next year should consider making major purchases, such as a car or boat, this year instead of next to get the sizable sales tax deduction, he said.
Luscombe, though, said Washington lawmakers are so polarized that it's doubtful they will reach a deal, especially in an election year.
Sunday, December 22, 2013
Year-End Financial Planning: Tax Cutting Tips
After the Christmas holiday winds down, 2014 will be right around the corner.
With one week left in the year, what can you do to help yourself tax-wise and investment-wise in the New Year?
Before the end of any year, take time to call or even meet with your accountants to check on your taxes. They can offer sound advice based on your specific situation. However, there are some general ideas for saving on taxes and helping with retirement planning.
Charitable giving is a great way for you to do well while doing good. The key is that charitable gifts can be given in a variety of ways that can increase the tax advantage to you and still fully benefit the charity.
Typically, a gift is given to a charity through a cash or check donation. The important thing in gifting under any circumstances is to check that the charity is a qualified 501(c)(3) under IRS rules. A charitable organization must apply to the IRS and meet certain guidelines to qualify donations for a tax deduction. If you gift to a 501(c)(3) charity, they should send a letter clarifying the gift for you to keep for your tax records to qualify the deduction for tax purposes.
There are other ways to give charitable gifts that can further benefit you and the charity. If you are low on cash, an alternative way to give to charity is through the donation of appreciated securities. If you have taxable accounts (non-retirement) with a holding (mutual fund or stock) with large unrealized capital gains, it makes sense to gift the security rather than cash.
You get the full market value of the gifted security while avoiding the capital gains on the appreciation. If you have an IRA and must take Required Minimum Distributions (RMDs) because you are over the age of 70 ½, distributing the RMD directly to the charity will save you the Federal taxes on the distribution, a very advantageous tax-advantage. Charitable giving helps the community and can benefit you tax-wise. For a contribution to a charity to qualify for 2013, the gift must be complete by December 31, 2013.
Another way to limit your tax liability is to maximize your contributions to tax-deductible accounts, including Traditional Individual Retirement Accounts (IRAs) and employer plans. This is a way to pay yourself first rather than the government.
An employee contribution to an employer retirement plan must be done before the end of the year so you would need to act before your last paycheck for the year. An IRA has more flexibility and can be funded with as much as $5,500 ($6,500 if age 50 or over) for 2013 up until April 15, 2014. So you get an extra 3 ½ months to fully fund an IRA and see what its impact would be on your tax situation after you have an idea of your income.
Investors who are eligible for an employer plan may not be eligible to make deductible contributions to an IRA so check with your accountant to see if your Adjusted Gross Income (AGI) qualifies you for a contribution.
What if you had a bad year and don’t need to save on taxes? Perhaps you spent part of the year unemployed or your consulting income was down. It is possible to do some forward tax planning and convert your IRA to a Roth IRA. This may make sense for you given many factors.
The downside of this conversion is that all the money moved from the IRA to the Roth is taxable as income. Therefore, you need to pay taxes on the amount from money outside of retirement. The long term benefits are that a Roth continues to grow tax-deferred, any qualified distribution is tax-free and there is no required minimum distribution at 70 ½.
There are many more ways a family or individual can maximize their retirement savings and/or save on taxes. The best thing to do is to take time near the end of each year to strategize what works best with your financial advisor and accountant. That team working together can help you build your net worth through smart decisions, investment strategies and tax planning.
With one week left in the year, what can you do to help yourself tax-wise and investment-wise in the New Year?
Before the end of any year, take time to call or even meet with your accountants to check on your taxes. They can offer sound advice based on your specific situation. However, there are some general ideas for saving on taxes and helping with retirement planning.
Charitable giving is a great way for you to do well while doing good. The key is that charitable gifts can be given in a variety of ways that can increase the tax advantage to you and still fully benefit the charity.
Typically, a gift is given to a charity through a cash or check donation. The important thing in gifting under any circumstances is to check that the charity is a qualified 501(c)(3) under IRS rules. A charitable organization must apply to the IRS and meet certain guidelines to qualify donations for a tax deduction. If you gift to a 501(c)(3) charity, they should send a letter clarifying the gift for you to keep for your tax records to qualify the deduction for tax purposes.
There are other ways to give charitable gifts that can further benefit you and the charity. If you are low on cash, an alternative way to give to charity is through the donation of appreciated securities. If you have taxable accounts (non-retirement) with a holding (mutual fund or stock) with large unrealized capital gains, it makes sense to gift the security rather than cash.
You get the full market value of the gifted security while avoiding the capital gains on the appreciation. If you have an IRA and must take Required Minimum Distributions (RMDs) because you are over the age of 70 ½, distributing the RMD directly to the charity will save you the Federal taxes on the distribution, a very advantageous tax-advantage. Charitable giving helps the community and can benefit you tax-wise. For a contribution to a charity to qualify for 2013, the gift must be complete by December 31, 2013.
Another way to limit your tax liability is to maximize your contributions to tax-deductible accounts, including Traditional Individual Retirement Accounts (IRAs) and employer plans. This is a way to pay yourself first rather than the government.
An employee contribution to an employer retirement plan must be done before the end of the year so you would need to act before your last paycheck for the year. An IRA has more flexibility and can be funded with as much as $5,500 ($6,500 if age 50 or over) for 2013 up until April 15, 2014. So you get an extra 3 ½ months to fully fund an IRA and see what its impact would be on your tax situation after you have an idea of your income.
Investors who are eligible for an employer plan may not be eligible to make deductible contributions to an IRA so check with your accountant to see if your Adjusted Gross Income (AGI) qualifies you for a contribution.
What if you had a bad year and don’t need to save on taxes? Perhaps you spent part of the year unemployed or your consulting income was down. It is possible to do some forward tax planning and convert your IRA to a Roth IRA. This may make sense for you given many factors.
The downside of this conversion is that all the money moved from the IRA to the Roth is taxable as income. Therefore, you need to pay taxes on the amount from money outside of retirement. The long term benefits are that a Roth continues to grow tax-deferred, any qualified distribution is tax-free and there is no required minimum distribution at 70 ½.
There are many more ways a family or individual can maximize their retirement savings and/or save on taxes. The best thing to do is to take time near the end of each year to strategize what works best with your financial advisor and accountant. That team working together can help you build your net worth through smart decisions, investment strategies and tax planning.
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