With the 2013 tax season behind us for most, the priority now is to start thinking about 2014.
The good news for 2014 is that no major tax legislation has been passed this year, and prospects for anything passing between now and the end of the year are unlikely. The bad news is that a collection of tax provisions—some that have provided significant benefits to many taxpayers—expired as of December 31, 2013. As of this date, the House of Representatives has passed a bill to extend most of these provisions, but that legislation is still awaiting action in the Senate. The consensus is that since the election is over and no perceived political risk will be taken (or advantage given away) the Senate will act. Our bet is sometime around New Year’s Day.
We will touch upon the more significant extender items later.
Even without tax law changes, the only way to keep April 15, 2015 from being an unpleasant surprise is to plan now. Please contact us so we can set a time to get a fix on your 2014 income and advise you on what steps may be taken prior to December 31, 2014 to minimize your tax liability. After December 31 it will already be too late.
We also wanted to tell you about some changes we have made internally. Some you won’t see, but one you will see is a change in the way we bill for individual income tax returns. Starting with the 2013 extension season, we began testing a fee structure that moves away from a time-focused system and is instead based upon the return content. The fees you will be charged will be based upon what schedules are prepared as a part of your return, the complexity of the forms, and the volume of the return, and each item will be detailed on your bill. As part of this change, your invoice will also be included in your tax return package, rather than mailed at a later date. Based on our experiences so far, we believe the system is a fairer representation of the effort expended and value delivered preparing your returns. Please feel free to let us know your thoughts on this change.
We also had mentioned in the past that we have changed our tax software. Though the transition has been a struggle, the improvements are significant. For instance, taxpayers with Schedule A, Schedule C, and Schedule E will receive several analytical summaries that compare your return to IRS statistical norms. These summaries should give you an indication of your audit potential, as well as what issues will be most likely to be looked at. We hope you will find these additions to be useful.
Tax Planning Strategies
There are a number of tax planning strategies that can be used before year end to minimize your 2014 tax. Some possible tax saving moves for individuals include:
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, and then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest.
Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases it may pay to actually accelerate income into 2014. For example, this may be the case when a person’s marginal tax rate is much lower this year than it will be next year, or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
For businesses, consider making machinery and equipment purchases before year end. Under the generally applicable “half-year convention,” a half-year worth of depreciation deductions can be secured for the first ownership year, even though the asset was not placed in service until the end of the year.
Although the business property expensing options are greatly reduced in 2014 (unless the previously discussed extenders bill is passed), don’t neglect to make expenditures that do qualify for current-year deductions. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
Expired Provisions and Tax Law Changes
As to the expired provisions that could impact most of you:
Energy credits for appliances
Educator expenses for elementary or secondary school teachers
Deduction for private mortgage insurance
Option to deduct state and local sales taxes
Discharge of indebtedness on principal residence exclusion from income
Deduction for qualified tuition
Increased expense deduction for tangible assets (returns to $25,000 from $500,000)
50% bonus depreciation
In addition to the above there are other, more esoteric provisions expiring as well. Please contact us if you have a specific question.
Shifting from expiring provisions to new developments, the Affordable Care Act provisions — particularly the penalties for failure to have health insurance — begin in 2015 and will have a more significant impact each year as we see the phase-in of the law. We are planning to attend several seminars this fall to get a better understanding of this complex and confusing legislation. Rather than disseminate inaccurate information as does the media, we ask you to allow us to gain a better working knowledge of the provisions most likely to impact you. We promise to provide more extensive coverage later this fall as we increase our knowledge base.
Thanks to you all for your continued support of our firm, and a special thanks to those of you who have been kind enough to refer us to a friend of a colleague.