Fall is a favorite time of year here in Mississippi. Football season (high school, college and NFL) is going strong and pumpkins are showing up everywhere in anticipation of Halloween. Before we know it, 2014 will be here!
With that in mind, another rite of fall comes into focus — tax planning. While not as exciting as football or as fun as Halloween, proper tax planning this time of year can have a meaningful impact on your bottom line — as a business or as an individual.
You many recall the uproar about tax law changes around New Year’s Day. After much debate, consternation and hand-wringing, significant tax increases for high-income taxpayers were passed into law and made effective for this year. Those are on top of other increases made as part of the new health care law. Finally, a number of business incentives were extended through 2013. They will not be available in 2014 unless re-extended.
A quick synopsis of some of the major changes would include the following for higher income taxpayers:
» The top individual tax rate increased from 35 percent to 39.6 percent;
» The top capital gain and dividend tax rate increased from 15 percent to 20 percent;
» The 3.8 percent Medicare unearned income surtax and .9 percent earned income surtax are new for 2013;
» Phase-outs of itemized deductions and personal exemptions were reinstated for 2013;
» Estate and gift tax rates increased from 35 percent to 40 percent.
Also, if you own a business, the opportunity to expense up to $500,000 of qualifying assets in 2013 reverts to $25,000 in 2014, while 50 percent bonus depreciation disappears completely.
So, what are some of the things we should think about before 2013 winds down?
First, effective tax planning is best done by looking at two years together and trying to minimize the overall liability over that two-year period. Generally, it makes sense to defer income and accelerate deductions if you believe that you will be in the same tax bracket this year and next. However, sometimes there will be an anomaly that would place you in a vastly different tax bracket one year versus another, such as a large windfall. This has to be considered along with the potential effects of alternative minimum tax (AMT).
Many professionals and businesses that are cash basis taxpayers can control when they bill and collect receipts and when they pay invoices. Individuals can time when they pay itemized deductions. Closely-held corporations can determine when to pay dividends. Sales of assets can be timed to best take advantage of lower capital gain tax rates or to harvest tax losses to offset other gains as long as these actions are also consistent with a long-term investment strategy.
From a business expansion perspective, the reductions in expensing of qualifying assets and elimination of 50 percent bonus depreciation for 2014 are real and immediate. These may both be re-extended by Congress before year end, but the chances, especially for bonus depreciation, are diminishing. Accelerating acquisitions into 2013 removes this concern.
With regard to estate and gift taxes, the changes in rates, exemption amounts and new portability provisions require an updated look at an estate plan. One obvious but overlooked idea is to maximize the annual gift exclusion. This year, the exclusion amount per donee increased from $13,000 to $14,000. That means that a donor can give this amount tax-free to as many donees as they like. This amount reduces their taxable estate dollar-for-dollar. It can also be doubled to $28,000 per donee by gift-splitting with a spouse.
These are just some basics. The earlier one sits down with their CPA and other advisors, the better the chances of effective year end planning.
Just as football and Halloween will be gone before we know it, so will the opportunity to reduce 2013 taxes.
Make it a treat, not a trick.
» John Scott, CPA, is a tax partner at HORNE LLP and has more than 25 years of public accounting experience serving as a tax advisor to corporate, flow-through and individual clients. He has participated in providing value-added tax services to clients including: tax compliance and planning, state and local tax restructuring, IRS practice, acquisition planning and structuring of transactions. John applies his specific knowledge of banking, manufacturing, agribusiness, retailing, real estate, telecommunications, and insurance to bring solutions to his clients.