[IMGCAP(1)]This year's tax planning is going to be heavily focused on accelerating deductions and maximizing tax credits, according to Evan Stephens, a tax manager at the business consulting and accounting firm Sensiba San Filippo.
“However, taxpayers should be advised that a number of tax benefits available in 2013 are not yet available in 2014, as Congress has let some very popular provisions lapse for 2014 and has yet to reinstate them into law for 2014,” he said. “These include bonus deprecation, larger Section 179 deductions, and a number of tax credits, such as the Research and Development Credit.”
Stephens recommends practitioners consider the following tips for their clients:
Pay your real estate taxes, personal property taxes and state income taxes before year end in order to push down your taxable income by increasing you itemized deductions. However, be aware that these deductions can phase out and/or be limited by alternative minimum tax.
Reduce income by taking advantage of other tax-exempt investment vehicles, such as muni bonds, which are tax-free for federal purposes, and, in most states, home-state bonds are also state tax-exempt for state purposes. However, be wary that investing in municipal bonds that have a private activity element (bonds funding new sports stadiums, etc.), as they are still taxable for Alternative Minimum Tax purposes.
Congress has not yet committed to reinstating the added benefits of bonus depreciation on fixed asset purchases for 2014. However, there is still a much smaller benefit through a Section 179 deduction of up to $25,000.
A small blip in the code allows for a much larger, $500,000 Section 179 benefit, for non-calendar year taxpayers whose tax years begin in 2013, but end in 2014. This may benefit some taxpayers who do not carry a calendar year end.
Congress has not yet reinstated the Research and Development credits or nonbusiness energy credits, but given these programs’ popularity will likely do so before year end. Taxpayers should be sure to keep up with the latest legislation, as some believe these will likely be extended into 2014 at some point in the coming year.
The business energy credits remain. These credits are for taxpayers that install solar, geothermal, combined heat and power (CHP), geothermal heat pump, fuel cell, microturbine or transition energy property for use in their business. The credit can be as much as 30 percent of the cost of the property.
“Long-term capital gains still maintain their preferential rates, but are subject to the additional 3.8 percent Medicare investment tax,” Stephens said. “Short-term capital gains are subject to ordinary income rates and the 3.8 percent Medicare investment tax.”
He recommends considering tax deferral mechanisms for significant tax gains, such as Section 1031 like-kind exchanges for real property sales or structuring the sale as an installment sale. “An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income,” he noted.
“Taxpayers should also consider realizing losses on existing stock holdings while maintaining the investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar but not identical investment. This is often referred to as loss harvesting,” said Stephens. “However, if the 31-day repurchase is not adhered to, the sales are considered a wash sales transaction and the losses are disallowed.”
Finally, Stephens urges his clients to maximize contributions to their tax savings and retirement vehicles such as 401K, 403(b), 457 plans, 529 plans, Health Savings Accounts, SEPs, and Keogh plans.
“If self-employed, set up a self-employed retirement plan,” he said. “Revisit decisions to contribute to a traditional versus a Roth retirement plan. Distributions from Roth IRAs and 401(K)s are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for high net worth individuals. On the contrary, if a taxpayer is hovering around the threshold for the new Medicare tax, he or she should consider moving Roth contributions to a traditional retirement plan. Maximizing contributions to a traditional plan could reduce taxable income below the threshold and, therefore, avoid an additional 3.8 percent tax on investment income.”