As of this writing, Congress has yet to decide if they're going to extend many popular tax breaks which expired at the end of 2013. It looks like they probably will but it's hard to say in advance exactly what, if anything, will come out of Congress before the end of 2014. We'll touch on those points below which we think will probably be extended in 2014 and keep you posted on developments in that area.
Having said that, all the traditional year-end strategies still apply. The general idea of all these strategies is to avoid having one particular year (either 2014 or 2015) show an abnormally low or high taxable income. Avoiding a spike in income is key so you don't get caught in the highest brackets or by some of the tax provisions which go along with higher income (such as the phase-out of itemized deductions and many other popular tax breaks). Similarly, you want to avoid an abnormally low year because those deductions and tax breaks which you are able to claim simply don't mean as much to a very low-bracket taxpayer.
Here's a list of some income items where you can control into which year the income falls:
- Deferring or receiving bonuses before January
- Holding onto or selling appreciated assets
- Accelerating income to use carry-forward losses and deductions which might be expiring
- Holding or redeeming U.S. Savings Bonds
- Entering into or selling installment contracts
- Postponing or electing Roth conversions
- Delaying or accelerating debt forgiveness income
- Minimizing or maximizing retirement distributions
- Accumulating or declaring dividends from closely-held C corporations
- Delaying or accelerating billable services
Here's a list of some deductions or credits where you can control which year the deduction falls:
- Accelerating or delaying itemized deductions so as to itemize one year and claim the standard deduction in the other
- Paying bills before year-end or delay payment until after year-end
- Paying state estimated taxes before year-end or delay until January
- Paying property taxes before the end of December or delaying until after New Year's
- Matching passive activity losses and income
Tax Planning for Individuals
The federal income tax rates for 2014 are unchanged from 2013: 10%; 15%; 25%; 28%; 33%; 35%; and 39.6%. The top rate for capital gains income is also unchanged from 2013 at 20%.
The NII Tax
Since 2013, taxpayers with qualifying investment income could be subject to the additional 3.8% tax on net investment income (the NII tax). The threshold amounts for the NII tax are $200,000 for most single taxpayers and $250,000 for most married taxpayers. If you have any investment income and you income is over these threshold amounts, you could be subject to the NII tax on your investment income. Investment income is items such as interest, dividends, capital gains, rental income, annuities, passive income, etc.
Additional Medicare Tax
This additional tax of 0.9% applies to all wages and self-employment earnings in excess of $200,000 for most single taxpayers and $250,000 for most married taxpayers.
Affordable Care Act (ObamaCare)
Effective January 1, 2014, the Affordable Care Act (ACA) required all but exempt individuals to carry qualifying health insurance or pay a penalty tax. The penalty tax for 2014 is $95 per person in your household, or 1% of household income, whichever is greater. Individuals who got health insurance through their state Marketplace may be eligible for the premium assistance tax credit, which is computed on your tax return. In order to comply with these new laws, you'll to provide evidence of qualified insurance coverage as well as a record of any advance premium assistance credit which was used to offset premiums paid through the Marketplace.
Potentially Extended Tax Breaks
Here's a list of those tax breaks for individuals which have a good chance of being renewed by Congress for 2014. However, until they are officially renewed you can't count on them:
- State & local sales tax deduction
- Mortgage debt income forgiveness exclusion
- Higher education tuition deduction
- IRA distributions to charities
- Teacher's classroom expense deduction
If you turned 70 ½ in 2014 or before, make sure you withdraw your required minimum distribution from any IRA accounts prior to the end of the year. Your IRA custodian can help you with this amount.
The gift tax exclusion for 2014 is $14,000. Gifts from one individual to another totalling this amount or less for 2014 do not have to be reported to IRS. A popular strategy in this area is called gift-splitting. It's where a husband and wife each give $14,000 to an individual (such as a child).
Tax Planning for Businesses
Bonus Depreciation and Section 179 Depreciation
Bonus depreciation officially expired at the end of 2013, and the limit on property qualifying for Section 179 depreciation was reduced from $500,000 to $25,000. However, these are both issues which could be revisited by Congress as soon as late November. The election to claim either sort of accelerated depreciation does not have to be made until your tax return is filed.
Research Tax Credit
This credit also expired at the end of 2013, but may well be renewed for 2014. The credit may be claimed for increases in business-related qualified research expenses.
Small Business Stock
An exclusion of 100% applies to gains on the sale of qualified small business stock acquired between September 27, 2010 and January 1, 2014. A 50% exclusion applies to stock acquired after December 31, 2013.
Qualified Production Activities Deduction
If your business in engaged in producing property for sale, it may qualify for this deduction. This provision allows for the deduction of a percentage of qualified production activities income. The computation of the deduction is quite complex, so if you think this deduction might apply to your business, please discuss it with your tax preparer.
As you can see, there is still a fair amount of uncertainty in regard to year-end planning for 2014. Please let us know if you have any questions and we'll help you navigate the maze!