“It’s never too late for tax planning,” a wise CPA once told me. “You’ve got till the ball drops to take action, and if you do it later than that, then you’ve got an early start for next year.”
Everyone in the tax business has seen their fair share of end-of-year tax planning tips. I’ve seen dozens, mostly from medium and large accounting firms, but also from wealth managers, lawyers, insurance reps, trust companies and charitable organizations.
They range from the mundane and obvious “defer income and accelerate deductions” to the more esoteric, such as “reduce your state unemployment tax by making a prepayment if your state allows it.”
Even the IRS has gotten in on the action by offering up some of its own tips: start a filing system, make charitable contributions (especially the special tax-free charitable distributions for certain IRA owners), and contribute to retirement accounts. For employers, the IRS suggests hiring a veteran by December 31 in order to claim the Work Opportunity Tax Credit, which can be worth thousands of dollars.
“We expect the tax rates to be generally the same in 2014 as in 2013,” said Mike Campbell, a tax partner in the Private Client Tax Services practice at BDO USA. “So we’re back to the advising our clients how to accelerate their deductions and defer income until next year.”
“Last year it was a different scenario,” he said. “Planning was inverse to the norm, where we advised accelerating income and deferring deductions into 2013 because the rates were higher this year than in 2012. But now we’re back to the standard practice for tax planning: defer income and accelerate deductions.”
So long as the taxpayer is not subject to the alternative minimum tax, the biggest deductions for most people would be state income taxes and property taxes, according to Campbell. “Prepay any state income taxes due by paying them by the end of December,” he said. “Then they will get a deduction for 2013 on their federal income taxes for state income taxes.”
“The same is true for property taxes,” he said. “Pay any property tax that is due in early 2014 by making payment in December of this calendar year and get a current deduction for 2013. The caveat, if the taxpayer is subject to the AMT for 2013, they shouldn’t do this, because they wouldn’t get the benefit of the deduction.”
“Those are two ways to accelerate deductions,” Campbell said. “Another way, if the client is contemplating a charitable contribution and has a choice, is to make the contribution in 2013. That way he or she will get a more current tax deduction, and a decrease in taxes currently for 2013.”
For the few clients lucky enough to get a bonus, Campbell recommends they push it into 2014. “If it’s paid in January, the tax liability is spread across 2014 and into 2015,” he said. “There’s no sense accelerating income into this year because all you do is pay taxes earlier.”
The 100 percent exclusion on gain for the sale of qualified small business stock is set to expire at the end of the year, Campbell observed. After the end of the year, the exclusion drops to 50 percent.
”If you buy stock in a qualified small business and hold it for five years, it would be eligible for exclusion of the gain of 100 percent up to $10 million,” he said. “This might not apply to Main Street America, but entrepreneurs who want to set up a C corporation or angel investors should take advantage of the opportunity to get the exclusion.”
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