NEW YORK; – As 2014 comes to a close and year-end tax planning begins, UHY LLP is offering a series of tips for individuals and businesses as they look to reduce this year’s taxes and plan ahead for 2015.
Currently Congress is in the process of negotiating the extension of many tax provisions that expired at the end of 2013 which include limitations on claiming immediate bonus depreciation, and other deductible items. These provisions will affect the ability of individuals and small businesses to plan with certainty.
“Given the legislative uncertainty, this year brings unique opportunities as well as challenges for individual and business taxpayers,” said Jim Daniels, partner with UHY LLP and managing director with UHY Advisors NY, Inc. “I encourage everyone to take a closer look at this year’s taxes and seek accounting guidance on your particular circumstances to make the best choices for you, your family and your business.”
Daniels offers the following guidance and tips related to the most important tax developments in 2014 for individuals and businesses:
- Deferring Income to 2015
If you expect your adjusted gross income to be higher in 2014 than in 2015, or if you anticipate being in the same or a higher tax bracket in 2014, you may benefit by deferring income into 2015. Deferring income will be advantageous so long as the deferral does not bump your income into the next bracket.
- Accelerating Income into 2014
In limited circumstances, you may benefit by accelerating income into 2014. For example, you may anticipate being in a higher tax bracket in 2015 or perhaps you will need additional income to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. However, accelerating income into 2014 will be disadvantageous if you expect to be in the same or lower tax bracket for 2015.
- Deduction Timing is Key
Deduction timing is also an important element of year-end tax planning but it can be very complex because a taxpayer must consider their adjusted gross income level and the effect of the alternative minimum tax, if any, and their filing status. Cash-method taxpayers should remember that an expense is only deductible in the year in which it is actually paid. Under this rule, if your tax rate is going to increase in 2015, it may be beneficial to postpone deductions until 2015. Checks must be dated and mailed by December 31, 2014.
- Medical Expenses
For 2014, medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 10% of adjusted gross income (7.5% for taxpayers age 65 or older).
- State Taxes
If you anticipate a state income tax liability for 2014 and plan to make an estimated tax payment most likely due in January, consider making the payment before the end of 2014. However, too high a payment could lead towards being subject to the alternative minimum tax so keep that in mind. Note that the election to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes has expired at the end of 2013 and has not yet been reinstated.
- Qualified Higher Education Expenses
Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expired at the end of 2013. If it is reinstated, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses.
- Surtax for Higher Earning Individuals
Higher earning individuals will be faced with a 3.8% surtax on unearned income (i.e., interest, dividends, capital gains, rents, royalties, and passive activities but does not include distributions from qualified plans, tax-exempt interest, and excluded portion of gain on sale of residence) and an additional 0.9% Medicare tax.
As the year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his/ her estimated income and net investment income for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional net investment income for the balance of the year, others should determine if they can reduce income other than unearned income, and others should consider ways to minimize both.
- Charitable Contributions
Consider making additional charitable contributions prior to December 31, 2014. A credit card may be used to charge donations in 2014 even though you will not pay the bill until 2015. A mere pledge to make a donation is not deductible, unless it is paid by the end of the year. Keep in mind that for donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property.
- Make Charitable Distributions From a Qualified Plan
Congress has not yet extended the rule allowing qualified charitable distributions (QCDs) for 2014. If it is reinstated, you can contribute up to $100,000 directly from your IRA to your choice of qualified charities without federal tax consequences. In the absence of any Congressional action, the rule allowing QCDs expired after 2013. The distribution guidelines are as follows:
- Allowed from traditional and inherited IRAs for clients over 70½
- Tax free to 501(c)3 charities if made payable directly to the charity from the IRA custodian
- Fulfills required minimum distributions (RMDs) up to $100,000
- Note however, that the RMDs will not be taxable and the charitable contributions will not be deductible.
- Time is of the Essence for Equipment Purchases
If you are in business and purchase equipment, you may make what is referred to as a Section 179 election, which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2013, you were able to elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2013. Another option was available for assets placed in service in 2013 (2015 for certain longer-lived and transportation property), where taxpayers can expense 50% of their business equipment purchases under IRC §168(k), a provision giving taxpayers “bonus” depreciation, mitigating the need for the §179 election. Both of these provisions expired on December 31, 2013 and are included in the discussion for an extension in 2014. Please consult your UHY LLP tax advisor as to the current status of the legislation.
For more information about UHY, please visit www.uhy-us.com.