The election is over. As a result, we have a Republican lead Congress. Now, maybe our politicians can get some stuff done! Additionally, it is that time of year again! Many people don’t want to think about it, but (if you plan properly) the happiest time of the year is just around the corner. The actions you take in these final months of 2014 can have a big effect on your taxes. This advisory will identify some key strategies to be implemented prior to the end of the year to effectively limit your tax liability.
BUT HANG ON THERE EVERYONE!
Of most importance is Section 179, advanced depreciation. In 2013, the maximum Section 179 deduction was $500,000. In 2014, the deduction dropped to $25,000. $25,000 isn’t much if you have income of $300,000. Now that the election is over, everyone in the tax community suspects there will be a new tax law containing improved (think 2013) Section 179 deductions.
AND HANG ON AGAIN!
In January 2013, bonus depreciation became limited to 50% of the qualifying, original use property. On January 1, 2014, bonus depreciation largely disappeared. What remains for 2014 are items of long production property only. We do not expect to see bonus depreciation soon, but there is that possibility for 2014 and even 2015.
As with most other tax years, the more taxable income your company earns in 2014, the more taxes you and your company will pay. Therefore, it is logical to defer any ordinary income you can until next year. This is especially true if you or your business will be in a lower tax bracket this year as a result of your tax planning.
For business tax planning, send out monthly billing later in the month of December. Because it takes, on average, 25 days to receive payment, any payments received after January 1, 2015 are credited and recognized as income in 2015, provided your business is on the cash method of accounting. This is not true for those using the accrual method of accounting.
For individuals, if you are to receive a bonus, defer it until next year. (BE CAREFUL – if you have a retirement plan that is based on a percentage of your gross pay for the year, you do not want to reduce your retirement contribution because of your deferred bonus.) Finally, you may decide to defer income using more traditional means, by participating in a deferred compensation plan, buying tax deferred treasury securities, or some specific certificates of deposit that allow for deferral of interest income.
We all hate paying bills, but now is the best time to pay them. Even if you wait to pay a given bill on December 31, you can still deduct the payment in 2014. For business tax planning, buy supplies in December and stock up for the next few months. In addition, the IRS will allow you to deduct the expense in 2014 if you have charged the item and not yet paid for it as long as you are on the accrual method of reporting.
For example, use your company credit card to purchase supplies for January, deduct the expense now, and pay the bill in January of 2015.
Individuals, remember to recognize any capital losses that you may have before year end. You are allowed to offset capital gains each year with any losses you incurred; and if the loss isn’t fully utilized this year, it can be carried forward to offset future gains to the extent of $3,000 per year. Pay your investment expenses early, including any mortgage interest, real estate taxes, and any state and local taxes.
By utilizing these year-end tax strategies, you can reduce your tax liability for the year. Lowering taxable income by deferring income, accelerating deductions, and utilizing tax credits results in lower tax liability. These methods work not only this year, but also year-to-year. The Center routinely examines tax situations and engages in tax planning, business succession, and estate planning. If you are considering beginning estate planning, keep in mind that you have until December 31 to take advantage of 2014’s gift exemption of $14,000. If you wait until 2015, you will forfeit the opportunity to take advantage of the 2014 gift exemption amount. Act now!
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors