Before the holiday season of Thanksgiving and Christmas get too crazy, it would be good to take some time and see if you can minimize your tax burden for 2014. Once December 31 is passed, 2014 is locked in.
As a disclaimer to the info below, there are a ton of popular tax rules that expired at the end of 2013 that congress may still decide to extend. As of the date of this post, congress hasn’t done that yet.
We have tried to be as brief as we can with this because it is a lot of info.
As a general rule accelerating deductions in the current year and deferring income into the next year is what most of the specific items mentioned below are doing.
Deferring Income – In the simplest of explanations, this is postponing income until next year. Maybe that means asking that your bonus get paid in January of next year. It could mean that you don’t deposit customer payments until January. If you are selling a property, doing an installment sale so that the bulk of the payments happen next year.
Accelerating income – In a few scenarios, it may make sense to actually claim more income this year. You could be expecting to have a large increase in income next year. In this case you want to tax your income this year at a lower amount. If you wait until next year, it will be in a higher tax bracket.
Charitable Giving with Stock – If you have stock that would have a large capital gain if you sold it, you can donate this stock to your favorite charity. By doing this, you avoid the capital gains on the stock, but you get a charitable contribution deduction for the market value of the stock.
Retirement Accounts – contributions to 401ks, traditional IRAs (not Roth IRAs), and other qualified retirement accounts give you a small tax deduction.
Underpayment penalties – The IRS has a requirement that you meet a minimum amount of withholding each year. If you got a refund last year or you owe less than $1,000 this year, then you don’t have to worry about this. For everyone else, you owe a penalty if you did not withhold either 90% of the current year tax or 100% of the previous year’s tax. (i.e. If I owed $2,000 last year, I need to pay $2,000 in withholdings this year to avoid a penalty.) To avoid this you can increase your withholdings on your w-2. (You can tell your HR department to withhold an extra amount above claiming zero.) If you are a business owner, estimated payments using 1040-es forms is how you do that.
Capital gains and losses – If you have a bunch of stock you sold for a gain, you can find other stocks you have losing positions on and sell those. Those losses will offset the gains you would have paid tax on. You can purchase the stock again, you just need to wait 30 days to do it.
Bunching itemized deductions – The IRS gives you a standard deduction. Your filing status determines what that is. You can claim either a standard deduction or itemized deduction on your tax return. If your itemized deductions are close to the same amount as your standard deduction, consider doing those itemized things in one year and then taking the standard deduction in the other year.
What do we mean? Make your January mortgage payment in December. Plan your doctor visits (unless an emergency obviously) to hit in one year calendar year as much as possible. Donate two years’ worth of items in the same year. Plan your charitable giving to be heavy in one year and light in the other.
Self-Employed Health Insurance Premiums – If you are considered self-employed (if you don’t know you can ask us), you are allowed to claim 100% of the amount paid during the taxable year for health insurance that covers, yourself, your spouse, your dependents.
Equipment Purchases – Normally you have to depreciate these over 5 years. You can make a “section 179 election” which lets you expense up to $25,000 of the purchase. In the past this has been $250,000 and we are all hoping congress will extend it.
Home Office Deduction – While we are not a fan of this deduction because of all the exceptions that apply to it, not to mention that it doesn’t really give you a great tax savings, the IRS has made a new safe harbor rule that allows you to take $5 per square foot of your home office space up to $1,500. That’s a 300 square foot space. Most of our clients have home offices larger than 300 square feet.
Inventory – Do you have inventory? You can check your inventory and identify anything that isn’t worth what you paid for it. Most businesses use an inventory method called “lower of cost or market.” What this means is that you can value your inventory and what you paid for it or market value. Whichever is lower. So if you have inventory that you can’t sell for what you paid for it, you can lower your inventory value which in turn gives you a higher cost of goods sold. A higher cost of goods sold means lower taxable income.
Entity structure – Having the proper business structure can save you thousands of dollars. The only way to know this is to talk to an intelligent tax professional (I used the qualifying word intelligent because not all CPAs are equal.)