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The following are some tax planning moves that can be implemented before the end of the year.

 

Defer Income to Next Year – If possible, defer income to next year. You’ll defer the tax on the income for one year and depending on your tax situation next year, you may end up paying less tax on that income next year.

Accelerate Expenses to this Year – Pay as much business and tax deductible personal expenses as you can such as charitable contributions before the end of the year to reduce your taxable income. That includes paying us too if you have an outstanding balance with us!

In short, the lower your taxable income or the more tax deductions you have, the less taxes you’ll pay.

Make a Purchase with a Credit Card - Consider using a credit card to prepay expenses that can generate deductions for this year. You can claim the expense in the year the credit card was charged, not when the credit card was paid.

Two Additional Taxes – Be aware that you may be subject to two other taxes as well. Therefore, you may want to accelerate expenses to this year or defer income to next year to reduce your income below the thresholds to avoid these taxes:

Additional Medicare Tax – This additional 0.9% tax is imposed upon wage earners and self-employed taxpayers whose wages and self-employment income exceeds a threshold amount. The threshold is $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others. Although each employer will withhold the additional tax, the employer is not required to account for other employment or both spouses working. Thus, in these situations where the total earned income exceeds the threshold amounts, the unpaid tax will have to be included on your current tax return.

Net Investment Tax – This is a 3.8% surtax on the lesser of a taxpayer’s net investment income or the excess of the taxpayer’s modified adjusted gross income in excess of the threshold amount, which is the same amount as for the additional Medicare tax explained above. This surtax would apply to home sale gain where the long-term gain substantially exceeds the $250,000 home-sale exclusion amount ($500,000 for joint filers). Withholding and estimated taxes should be increased as necessary to cover this tax.
Retirement Plans – If you are self-employed, incorporated or in a partnership and don’t have a retirement plan, you may want to establish a retirement plan. The contributions that you make to the plan are tax deductible. The earnings grow tax deferred.

Certain types of plans must be established before the end of the year in order for the contribution to be deductible for this year, even if the actual contributions aren’t made until next year. The different types of retirement plans are; Solo 401(k), Profit Sharing, Regular 401(k), SEPIRA, Simple IRA, Traditional IRA, Roth IRA, Defined Benefit Plan and etc.
myRAs - The Treasury Department is expected to unveil a new retirement savings arrangement before the end of this year. The new accounts are called myRA. These accounts will be offered through employers that elect to participate. Account holders will build savings for 30 years or until their myRA reaches $15,000, whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs. Small business owners should explore the benefits of offering myRAs to their employees. As more details are released, business owners can weigh the value of these new accounts. At the same time, business owners can explore other retirement savings vehicles, including SIMPLE IRA plans, SEP plans, and payroll deduction IRAs. Our office can explain the mechanics of these savings programs.

Pay Children – If your child/children help you with your business, you should hire them like an employee and pay them for their services. If your business is a sole proprietor or a partnerships, then your child’s wages is not subject to payroll taxes either. If you’re incorporated, then your child’s wages is subject to payroll taxes.

You would be creating an expense for you and income for your child. However, your child’s wages up to their standard deduction ($6,200 for 2014 and $6,300 for 2015) is tax free. Then your child can start a retirement plan such as a Traditional IRA and make a tax deductible contribution to it. For 2014, the amount is $5,500.

Thus if you paid your child $11,700 ($6,200 + $5,500), the entire amount would be tax free to your child and a business deduction for you. Assuming that you are in the highest marginal tax brackets, 39.6% federal and 12.3% state, you would save approximately $6,072 ($11,700 x 51.9%) per child per year in federal and state taxes.

Your child can use the salary he or she receives and the money they invest in the Traditional IRA to pay for their college expenses. It’s a win/win situation for you and your child/children. However, there must be a legitimate employee/employer relationship and you must be able to prove the hours worked and services provided.
Realize Losses on Stock While Substantially Preserving Your Investment Position - There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 30 days before the sell or at least 30 days after the sell.

Long-term capital gains are taxed at the following federal rates:

(a) 20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income
(b) 15% if they would be taxed at a rate of 25% to 35% if they were taxed as ordinary income, and
(c) 0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income.

For California there is no lower state tax rate on capital gains.

Therefore, if you have capital gains this year, you can offset the gain by selling investments that are at a loss by December 31 to offset the loss against the gain.

C Corporations & Dividends - If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you'll be taxed at a maximum federal rate of only 24.7% versus the highest rate of 44.3%.

Employer Health Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs. Maximum contribution for this year is $2,500.

Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.

The amount that can be set aside in a health savings account for this year is: $3,300 for individuals and $6,550 for families. Those 55 or older can contribute an additional $1,000.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA or your other retirement accounts into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.

State Income Taxes – State income taxes paid during the year are deductible as an itemized deduction on your federal return. As long as pre-paying the state taxes does not create an AMT problem and you expect to owe state and local income taxes when you file your current year tax return. Thus, it may be appropriate to increase your withholding at your place of employment or make an estimated tax payment before the close of this year to advance the deduction into this year.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your next year’s tithing, thus advancing the deduction into this year. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan, and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2014, you can delay the first required distribution to the first quarter of 2016, but if you do, you will have to take a double distribution in 2016. Consider carefully the tax impact of a double distribution in 2016 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 in 2014, it’s also $14,000 for 2015, to an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the Kiddie tax rules.

Kiddie Tax Rules – Basically the first $1,000 of your child’s unearned income, such as interest or dividends, is tax free. The next $1,000 is taxed at your child’s tax rates and anything over $2,000 is taxed at your highest marginal rate.

Thus by making gifts to your child/children and having them invest it so that they earn the interest or dividends income from the investment, you will decrease your taxes.

Avoid Underpayment Penalties – If you are going to owe taxes this year, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory limit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss this year, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

Code Section 179 Expensing – The Section 179 deduction, which allows current expensing of items normally capitalized and depreciated, is also in limbo until the fate of the tax extenders bill is known.

Unlike the bonus depreciation, however, there is a limit on the amount that may be expensed and the business must have taxable income to take advantage of this deduction. If the bonus depreciation and Section 179 deduction are passed, we need to evaluate whether it may make more sense to spread these deductions over the life of the property by electing out of these provisions. Currently, for taxable years beginning in 2014 and thereafter, your business may immediately expense up to $25,000 of Section 179 property annually, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $200,000.

If the EXPIRE bill becomes law, it would increase the maximum amount and phase-out threshold in 2014 and 2015 to the levels in effect in 2010 through 2013 ($500,000 and $2 million respectively). The law would also extend the definition of Section 179 property to include computer software and $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Bonus Depreciation - Although bonus depreciation is not currently available for 2014, there is a good possibility it will return. While the likelihood of bonus depreciation being available for 2014 depends on the "tax extenders" bill (i.e., the EXPIRE bill) being passed and signed into law, many politicians have a vested interest in seeing this bill come to fruition. The drawback is that we may not know until late 2014 or even early 2015 whether purchases in 2014 will qualify for the bonus depreciation or what amounts will qualify. On the assumption that the bill passes as written, the 50-percent additional first-year depreciation deduction in effect in 2013 will be extended to qualified property purchased and placed in service before 2016 or before 2017 for certain longer-lived and transportation assets..

Purchase an SUV for Business – If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross [loaded] vehicle weight), consider buying it before December 31. Due to a combination of favorable depreciation and expensing rules, and depending on the percentage of business use, you may be able to write off most of the cost of the heavy SUV this year.

Pass-through Issues - Many business operations are not taxed on the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners or to their S corporation shareholders. Starting in 2013, these owners face new year-end planning challenges in the form of a higher individual tax rate of 39.6 percent and additional surtaxes on passive income by way of the net investment income surtax of 3.8 percent and the Additional Medicare Tax of 0.9 percent on compensation, both aimed at the “higher-income” taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for this tax year.

Affordable Care Act - As of January 1, 2014, the Affordable Care Act requires all individuals to carry health insurance or make a shared responsibility payment, unless exempt. For many, employer-provided health insurance will satisfy the individual mandate. Others will satisfy the individual mandate if they are covered by Medicare or Medicaid. Individuals who are not exempt will need to make a shared responsibility payment when they file their 2014 returns in 2015.
Generally, the shared responsibility payment amount is either a percentage of the individual's income or a flat dollar amount, whichever is greater. The amount owed is 1/12th of the annual payment for each month that a person or the person's dependents are not covered and are not exempt. For 2014, the payment amount is the greater of:

1 percent of the person's household income that is above the tax return threshold for their filing status; or A flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.
The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014.
The lack of health insurance does not automatically mean an individual must make a shared responsibility payment. The types of exemptions are broad. For example, an individual may have no affordable coverage options because the minimum amount he or she must pay for the annual premiums is more than eight percent of household income. An individual also may have a hardship that prevents him or her from obtaining coverage.
Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses for this year. If it is not the maximum allowed for computing the credits, you can prepay next year’s tuition as long as it is for an academic period beginning in the first three months next year. That will allow you to increase the credit for this year.

Hire Veterans – If you are considering hiring some new employees between now and the end of the year, you might consider hiring a qualifying veteran so that you can qualify for the work opportunity tax credit (WOTC). The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran’s period of unemployment and whether he or she has a service-connected disability).

College Access Credit – California has a new personal and corporate tax credit for 2014 through 2016 for contributions made to the College Access Tax Credit Fund. By making a contribution to the fund you will receive a credit certification. The funds will be used to bolster the dwindling resources used to provide Cal Grants to low-income college students.

You should apply for the credit before making the contribution. The amount of state tax credit that you will receive is:

For 2014, 60% of the amount contributed
For 2015, 55% of the amount contributed
For 2016, 50% of the amount contributed

There is no limit on the amount that you can contribute. However, the annual amount that can be certified is $500 million.

Again, first get the certification by going to www.treasurer.ca.gov/cefa and then make the contribution. To receive the 2014 credit, applications must be received by 5 pm on December 31, 2014.

Paying Federal Taxes – A new Direct Pay system allows taxpayers to pay their federal tax bills and make estimated tax payments online directly from a checking or savings account, without fees. Additional payments types will likely be added in the future. Please go to www.irs.gov/payments/direct-pay.

2015 Tax Numbers - The IRS and the Social Security Administration recently published some inflation-adjusted numbers for 2015. Use these numbers as you begin your tax and financial planning for the coming year.

* Social Security Taxable Wage - The limit for will be $118,500. For 2014 it is $117,000.

* Kiddie Tax Rule - The threshold for unearned income a child can earn in
without having the Kiddie tax apply is $2,000.

* Annual Gift Exclusion - The amount that can be given each year without paying
gift tax is $14,000 ($28,000 for joint gifts).

* 401(k) Deferral - The maximum salary deferral for a 401(k) is $18,000. The catch-up limit for those 50 or older is $6,000.

* IRA Contribution - The maximum IRA contribution limit $5,500; the limit for those 50 or older is $6,500.

* Simple IRA - The maximum salary deferral for Simple IRAs is $12,500. The catch-up limit for those 50 or older is $3,000.

* Defined Contributions – The maximum defined contribution amount is $53,000.

* Unified Estate & Tax Exclusion – The amount is $5,430,000.

Caution – There are additional factors to consider for a number of the strategies suggested above, and you are encouraged to contact us prior to acting on any of the advice to ensure that your specific tax circumstances will benefit.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.