As the end of the year sneaks up on us once again, it’s time to consider any last-minute tax planning moves to save taxes on your 2014 return and into the future. This year, year-end planning poses some special challenges, as Congress has yet to act on a long list of favorable tax provisions that expired at the end of 2013. These tax breaks may very well be retroactively reinstated and extended as they have been in the past, but due to the elections on November 4th it is likely that Congress will not make a decision on these provisions until the very end of 2014 (or even early 2015). As soon as an update on the status of the expired tax provisions is available, we will be sure to let you know. In the meantime, there are still steps you can take to reduce your tax bill for 2014 based on the current tax law. Contact us at your earliest convenience if you would like to discuss a tax saving plan specific to your current circumstances.
Year-End Strategies for Individuals
- Use stock losses to offset capital gains during the year while substantially preserving your investment position. This can be done by selling the original holding at a loss and then buying back the same securities 31 or more days later. We advise that you discuss any year-end trades with your CPA or investment advisor.
- Dispose of passive activities with suspended passive activity losses. It may make sense to dispose of holdings in passive activities that continue to generate losses that are suspended due to passive activity loss limitations. This will allow you to recognize the suspended losses in the year of disposition.
- Evaluate traditional IRAs converted to Roth IRAs earlier in the year. If the account has declined in value, it may be beneficial to recharacterize the account back to a traditional IRA to avoid having to recognize the amount of the original conversion as income for 2013.
- If you can coordinate doing so with your employer, it may be advantageous to postpone bonuses until 2015.
- Accelerate the payment of deductible expenses such as property taxes and charitable contributions. You can use a credit card to pay the expenses and they are deductible in 2014, even if the credit card is not paid until 2015. Additionally, consider making payments for miscellaneous deductions, such as professional dues and job-related expenses, in December rather than January in order to exceed the 2% of AGI threshold. This “bunching” strategy also applies to medical expenses in order to exceed the 10% of AGI threshold.
- If you have not yet set aside the maximum amount allowed in your employer’s health flexible savings account, consider doing so now.
- If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014.
- Make gifts in the amount of the annual exclusion ($14,000 per donee) to save gift and estate taxes. This may also save family income taxes if appreciated or income-producing property is gifted to family members in lower tax brackets who are not subject to the kiddie tax.
- High-income taxpayers should be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to wages in excess of $200,000 ($250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately).
Year-End Strategies for Businesses and Business Owners
- Accelerate purchases of business machinery, equipment, and other depreciable assets. If these assets are placed in service before the end of the year, generally a half-year’s worth of depreciation is allowed. Additionally, these assets may qualify to be expensed entirely in the first year under section 179. Under current tax law, section 179 expense for 2014 is limited to $25,000 and phases out when the amount of property placed in service for the year exceeds $200,000.
- The “de minimis safe harbor election” is also available for businesses. This election allows for businesses to expense the costs of inexpensive assets and materials and supplies that are not required to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property cannot exceed $500 (or $5,000 if the business as an applicable financial statement (e.g. audited financial statement with an independent CPA’s report). We recommend that you consult with your CPA on your specific situation before expensing such items to ensure that your business meets all of the requirements for the election.
- Corporations should consider accelerating income from 2015 to 2014 if doing so will prevent the corporation from being pushed into a higher tax bracket for 2015. Conversely, corporations should consider deferring income until 2015 to avoid moving into a higher tax bracket for 2014.
- If a corporation has a small corporation alternative minimum tax (AMT) exemption to preserve, it may be advantageous to defer income until 2015 in order to do so. Note that once a corporation fails to qualify for the exemption in any given tax year, it will not qualify for the exemption in any subsequent tax year.
- Consider deferring cancellation of debt events until 2015 to reduce 2014 taxable income.
- A corporation other than a “large” corporation that anticipates a small net operating loss (NOL) this year and taxable income next year, may benefit from accelerating enough income from 2015 to 2014 (or deferring enough 2014 deductions) to create a small amount of taxable income for 2014. This allows the corporation to base its estimated tax payments for 2015 on this small amount of income, rather than 100% of its larger 2015 taxable income.
- Owners of partnership or S corporation interests should consider whether they need to increase their basis in the business so that losses may be deducted in the current year.
These are just some of the steps that can be taken before year-end to save taxes. We will be happy to work with you to customize a plan that works best for your circumstances. We will be sure to provide updates on the expired tax provisions as they become available, so that you can take advantage of any additional tax saving moves in a timely manner.