Take a Bite Out of Your Taxes
It's hard to believe that we're almost midway through the final quarter of 2013. It’s easy to forget year-end tax planning, but this is the time that managing tax liabilities and planning for the year ahead should be on everyone's mind.
Although you may have until April 15, 2014, to file your tax return, if you take a few simple steps now, before the year’s end, you can greatly help manage taxes due. Whether you’re filing as an individual or a small business, planning now can help you maximize benefits and minimize taxes.
We consulted six South Carolina tax professionals to provide some tips to help you make the best of the upcoming tax season.
Changes in 2013’s Tax Law: American Taxpayer Relief Act
In the final hours of Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, which in part addressed the dramatic sunset of several tax breaks instituted by the Bush administration. In addition to retroactively implementing the tax breaks for 2012, many of these same tax breaks were continued through the end of 2013. And several are currently slated to expire in January 2014. So to take advantage of them, you will need to act before the end of this year.
Section 179. Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. When the Section 179 deduction was created, it was seen as an incentive to encourage businesses to buy equipment and make capital investments in themselves.
The Section 179 deduction is, according to Greenville-based CPA Dan Livengood, critical for entrepreneurs and other small businesspeople any time they make a major purchase. “Normally when a company makes a capital purchase they have to depreciate that purchase over several years,” said Livengood. “In other words, if a small business buys a $1,500 copier, normally they would have to take that deduction over several years. What the Section 179 small business rules say is that rather than depreciate that purchase over several years, they can record it as a piece of equipment and deduct the full amount this year.”
Originally there was a $15,000 cap on Section 179 deductions. But under the Bush administration that cap was bumped up to $200,000. The American Taxpayer Relief Act extended those higher amounts through the end of 2013. But as of right now, this provision dies in January 2014 – strong incentive for businesses to make those big capital purchases before the end of 2013.
Bonus Depreciation. There is also Bonus Depreciation, which is scheduled to expire totally after the year’s end. Bonus Depreciation covers new equipment only and is useful to very large businesses spending more than $2,000,000 on new capital equipment. Also, businesses with a net loss in 2013 qualify to deduct some of the cost of new equipment and carry forward the loss.
According to Roxanne Caldwell of Dixon Hughes Goodman LLP in Greenville, “Bonus depreciation allows a business to take an additional deduction of 50% of the cost of qualifying property in the year in which it is placed into service. Generally, qualifying property includes original use property with a class life of 20 years or less.”
Qualified Leasehold Improvements Deduction. Leasehold improvements (also referred to as “build-outs”) are alterations made to rental property in order to customize it for the specific needs of a tenant. For example, a restaurant rents a space and installs a bar in it. You can deduct half the cost in the year you put the leasehold improvement in place. Some examples of leasehold improvements include: lighting changes, painting, building partitions, and adding bathrooms.
Research & Development Credit. The Research & Development Tax Credit is for taxpayers of any size that incur R&D expenses. This includes improving products, processes, formulas or software. “It’s also a credit that a lot of businesses overlook,” said Livengood. These credits are particularly good for startups, since R&D costs incurred in years when a company has no income can be carried forward to offset taxes on future profits.
Personal Income Tax Law Changes
Although the new tax laws are primarily designed to increase taxes for those with higher levels of income, everyone with earned income is affected. For example, anyone with earned income has seen a reduction in take-home pay this year because the employee Social Security tax rate, which was reduced from 6.2 percent to 4.2 percent in 2011 and 2012, is once again 6.2 percent.
Other changes in the law affect higher income individuals. According to attorney Mac McLean with Haynsworth, Sinkler & Boyd PA in Greenville, “Congress did add a new top income tax bracket for those with higher incomes. In addition, the maximum tax rate on qualified capital gains was 15 percent in 2012, but for 2013, the top rate goes to 20 percent for higher-income taxpayers. There is also a new ‘net investment income tax’ which is a 3.8 percent tax on net investment income, applicable to persons with modified adjusted gross income over certain thresholds, and a new ‘additional Medicare tax’ of 0.9 percent on wages over a certain threshold.”
MacLean went on to say, “For 2013, for individuals, the traditional tax planning efforts are key. For example, one should time capital gains and capital losses in order to avoid paying a capital gains tax when a loss could be recognized so as to offset that gain.”
Now is the time to have an income tax projection for 2013 to determine the potential impact of the various changes on your tax situation, especially if you make over $200,000 per year. “Everyone’s situation is different and each person should consult with his or her own personal tax advisors regarding these tax strategies,” according to MacLean.
Minimize Your 2013 Taxes
According to Sara Tipton of Bokesch & Tipton LLC in Columbia, “There is still plenty of time to reduce your tax liability for 2013.”
“First, you can fund your IRA or increase your retirement contributions. You have until April 15, 2014 to make IRA contributions for 2013. The IRA contribution limit for 2013 is $5,500. If you are 50 or older by Dec. 31, 2013, you may contribute an additional $1,000 to an IRA. To increase your retirement contributions through your payroll, such as 401(k) contributions, you will generally need to talk to someone in the payroll department of your employer. The maximum contribution for a 401(k) is $17,500, plus an additional $5,500 if you are over 50,” according to Tipton.
For the end of 2013, consider managing gross income and bunching deductions, suggests Tony Perricelli with Scott & Company LLC in Columbia. However, these strategies require that you have some say-so over when you receive income and pay for deductible expenses.
“Some ideas for managing income include investing in tax-free bonds or tax-deferred annuities to avoid the Net Investment Income Tax, maximizing retirement contributions, delaying the receipt of business income for your cash basis business, making large planned charitable contributions before year-end, and putting new capital equipment in service for your business before year-end,” said Perricelli.
Bunching your deductions simply means fitting as many deductible expenses into one tax year as possible. You will need to keep track of your expenses throughout the year, and if they are falling short of a deduction by the end of the year you can prepay certain services or take care of medical expenses before the year is over to meet statutory minimums.
“Medical deductions don't benefit you unless they are more than 10% of your gross income,” Perricelli explained, “and miscellaneous itemized deductions such as investment fees and employee business expenses have to be greater than 2% before they are deductible.”
For example, if your gross income is $100,000, then your medical expenses must total $10,000 before you can list them as a deduction. If your medical expenses fall short of this minimum threshold, you might consider, for example, purchasing a year's supply of contact lenses to increase your expenses and qualify for the deduction.
Mark McCall of McGregor and Company in Columbia reminds his clients to make sure they’ve contributed the maximum amount allowable to their retirement plans and health savings accounts. He also recommends that “individuals should look at their investments to see if they have any unrealized capital losses that can be taken to offset capital gains and or to offset ordinary income ($3,000 max).”
Preparing for 2014
What can you do to get ready for 2014? Keep good records, according to Livengood. “It’s getting harder and harder to predict the future with tax law. The best thing you can do is to stay informed and keep good records.”
“The thing to be able to do is when your accountant asks you how much you spent on something, you should be able to search through your records and give him an answer,” Livengood continued. “If you have terrible records you’ll spend days trying to find things or you won’t be able to come up with an answer at all.”
Taxes and the Affordable Care Act
Beginning in 2014, there are two important tax implications of the Affordable Care Act. There are tax penalties if you don’t have health insurance. And there is a tax credit (if you qualify) that will help you pay for health insurance. For businesses, the employer mandate has been postponed until 2015. But as of 2014 all individuals will be required to maintain health insurance.
According the Roxanne Caldwell of Dixon Hughes Goodman LLP in Greenville, “The penalty for those without coverage starts at 1 percent of taxable income or $95 per adult and $47.50 per child (up to $285 per family) whichever is greater, in 2014. It increases to 2.5 percent of taxable income or $695 per adult and $347.50 per child (up to $2,085 per family) by 2016. There is a tax credit available for low-income taxpayers to help pay the cost of coverage if you earn between 100 percent ($23,550 for a family of four) and 400 percent ($94,200 for a family or four) of the federal poverty level. “