If you are like me, it’s hard to believe that 2013 is nearly over and that it’s time to think about year-end tax planning. Unfortunately, income tax liabilities for 2013 may be higher than recent years. Taxpayers face higher top rates for ordinary income, capital gains, and dividends. There are two new taxes which apply to high income individuals: a complex 3.8% tax on net investment income and a 0.9% payroll tax on wages to pay for Medicare. The 0.9% payroll tax applies to individuals receiving wages in excess of $200,000 ($250,000 for married couples filing jointly).
In addition, many individual and business tax provisions are set to expire at the end of 2013 (and many observers believe it is unlikely that these will be extended). For individuals, key tax provisions which are set to expire in 2013 include: a) the above-the-line deduction for higher education costs; b) the option to deduct sales and use taxes in lieu of state and local income taxes; and c) for taxpayers over 70-1/2 years of age, tax-free distributions from IRA accounts for charitable purposes. For businesses, key tax provisions which are set to expire in 2013 include a) the $500,000 Sec. 179 expensing limitation; b) the bonus 50% first-year depreciation for new equipment and software; c) the 15-year depreciation period for qualified restaurant buildings and improvements, qualified leasehold improvements, and qualified retail improvements.
In light of these realities, we recommend that taxpayers consider the following actions to plan for and hopefully reduce their 2013 tax bill:
- Medicare Tax Planning To Avoid Underpayment Penalties. Self-employed persons must account for the additional 0.9% Medicare tax on wages in excess of $200,000 when making estimated tax payments. In addition, certain employees must take this tax into account. If an individual earns less than $200,000 from two employers, but over $200,000 in total, that individual would be responsible for paying the additional Medicare tax. There may be no withholding from either employer since wages from each employer do not exceed $200,000.
- Realize Capital Losses In 2013 To Offset Capital Gains. You can sell investments subject to capital losses and then purchase similar holdings — or even the same securities after a waiting period.
- Accelerate 2013 Deductions Or Postpone Income Until 2014. This strategy, if effectively planned, may allow you to claim certain deductions or credits — such as higher education tax credits, child tax credits, and student loan interest deductions — that are phased out for persons with higher levels of taxable income. Postponing income may also be a good strategy for persons who expect to be in a lower marginal tax bracket in 2014.Of course, it may also be beneficial to shift income (where possible) into 2013. For example, if a person intends to purchase health coverage on a health exchange (assuming the government’s website starts to work), that person may be eligible for a higher tax credit in 2014 if the person has lower 2014 income.
- Big Purchases For Christmas! If you plan to make a big dollar purchase, you could make this purchase in 2013 to assure a deduction for sales tax on the purchase (if you will elect to claim the sales tax deduction in 2013 rather than the income tax deduction). Barring Congressional action, this election will not be available in 2014.
- Bunch Your Allowable Deductions. You may be able to reduce your total 2013 and 2014 income tax bills by applying a bunching strategy to medical expenses, miscellaneous itemized deductions and other itemized deductions.
- Make Energy Saving Improvements. Homeowners can make energy saving improvements to their residence in 2013. These may include adding extra insulation, installing energy saving windows, or investing in energy efficient heating and air equipment. Homeowners may qualify for a tax credit if the improvements are installed in 2013.
- Pay Tuition In 2013. The $4,000 above-the-line deduction for qualified tuition and higher education expenses is scheduled to expire after 2013. Thus, parents and students may consider paying eligible expenses in 2013 if that will increase their available deduction.
- Settle Your Insurance Or Damage Claim In 2013. Taxpayers should consider settling an insurance or damage claim in 2013 to maximize the casualty loss deduction in 2013.
- Purchase And Expense Business Property. Businesses may wish to purchase property that qualifies for the Sec. 179 business property expensing option. In 2013, the expensing limit is $500,000, while the beginning-of-phaseout amount is $2,000,000. In 2014, barring Congressional action, the dollar limit will drop to $25,000 and the beginning-of-phaseout amount will drop to $200,000. In addition, expensing will not be available for qualified real property in 2014.
- Take Advantage Of Other Expiring Business Incentives. Businesses should consider buying property that qualifies for the bonus 50% first year depreciation if purchased and placed in service in 2013. Businesses may also claim the federal work opportunity tax credit by hiring qualifying workers before the end of 2013. Finally, businesses may also wish to make qualifying research expenses in 2013, as a federal research credit will expire after 2013.
If you would like to discuss any of these planning opportunities in more detail, do not hesitate to contact any member of the McGrath North tax group.