Tax Planning for 2014

This year's tax planning is going will focus heavily on timing of income and expenses, as the Medicare investment tax (MIT) of 3.8% can create an additional tax burden.  Taxpayers should be advised that some tax benefits available in 2013 are not available in 2014, as Congress has allowed some provisions to lapse. These provisions, which include bonus deprecation, larger section 179 deductions (expensing depreciable assets in the year of purchase), and a number of tax credits, such as the Research and Development Credit, may be reinstated, but with the gridlock in Washington, it is unpredictable.

 

Assuming that your income is high (above $400,000 in 2014), consider the following income shifting ideas:

1. Pay your real estate taxes, personal property taxes and state income taxes before year end in order to decrease your taxable income by increasing your itemized deductions.  (Note: These deductions can phase out and/or be limited by alternative minimum tax [AMT].)
2. Reduce income by taking advantage of other tax-exempt investment vehicles, such as muni bonds, which are tax-free for federal purposes, and, in most states, home-state bonds are also state tax-exempt for state purposes. (Note: Keep AMT in mind with private activity bonds).
3. “Depreciate” using a Section 179 deduction of up to $25,000.
4. Congress still has not reinstated the Research and Development credits or nonbusiness energy credits, but given their popularity will likely do so before year end. Plan on them being reinstated, but understand the potential risks.
5. With the business energy credits remaining, capitalize on investments that creative these credits. These credits are for taxpayers that install solar, geothermal, combined heat and power (CHP), geothermal heat pump, fuel cell, micro-turbine or transition energy property for use in their business. The credit can be as much as 30 percent of the cost of the property.
6. Timing of capital gains and capital losses so that you do not inadvertently exceed the MIT limits and create an increased tax liability.
   1. Consider a 1031, tax free exchange, where possible.
   2. Consider an installment sale as it will delay the recognition of the gain until the funds are received.
   3. Consider taking losses to offset gains (Note: Losses themselves are limited to $3,000 a year in excess of gains.  Also, selling at a loss and repurchasing at least 31 days later avoids wash sale rules).
7. Maximize contributions to retirement accounts to reduce current year income.
8. Minimize distributions from retirement accounts.

All of the ideas above assume the need to reduce income for this year.  The converse may be true.  If you anticipate a very strong 2015 and your income is significantly lower in 2014, it may be effective to employ the opposite strategy and increase your income for this year.  Keep in mind that, by accelerating income and reducing expenses, you will be paying taxes early and the earning potential of those early tax payments should also to be considered.

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