As the end of 2014 approaches, it is important to perform an assessment of your current tax situation so you aren’t hit with any surprises when it comes time to file your tax returns.
Federal tax laws haven’t changed much from last year, but dozens of temporary tax provisions expired at the end of 2013. Congress is expected to renew expired provisions retroactively to Jan. 1, as they have done in years past, but there is no guarantee that every expired provision will be renewed.
The expired provisions are diverse in purpose and include provisions affecting individuals, businesses, energy, community assistance, disaster relief and the charitable sector.
Some of the more notable personal provisions are deductions for mortgage insurance premiums, teachers’ out-of-pocket expenses, state and local sales taxes, and qualified tuition and related expenses.
For businesses, the loss of 50 percent bonus depreciation expense and the reversion of the section 179 expense deduction to $25,000 are probably the ones with the widest impact. If Congress decides to extend these provisions retroactive to Jan. 1, 2014, it will leave taxpayers and tax professionals with just a few weeks or a few days left in 2014 to make any tax moves for the year.
It is also possible Congress, as they did two years ago, will wait until after year-end to pass any extenders, leaving taxpayers to gamble on the provisions they expect to see reinstated. Because of the diversity of these tax provisions, many taxpayers and business entities could be affected.
Tax planning during times of uncertainty and pending legislation may seem pointless. However it is more important during these times to have a plan in place for different scenarios. You will then be prepared, once legislation has passed, to move quickly to take steps to minimize your
individual and/or business taxes for 2014.
Individual taxpayers should be aware of their current tax situation to effectively plan for year-end. Having the ability to control timing of when you receive income and when you pay deductible expenses is a valuable tax planning tool.
Generally, taxpayers would like to defer income recognition into future periods and pay deductible expenses in the current tax year. Individuals are usually cash basis taxpayers. Cash basis taxpayers can defer income recognition by choosing to receive income such as bonuses and consulting or other self-employment income in 2015 instead of the end of 2014.
Cash basis taxpayers are allowed to deduct expenses when they are paid or charged to a credit card. Potentially controllable expenses include: state and local income taxes, property taxes, mortgage interest, margin interest and charitable contributions.
Before you decide to accelerate or defer income, it is important to determine if you may be subject to the Alternative Minimum Tax (AMT). Many deductions used to calculate regular tax are not allowed under AMT. You should work with your tax advisor to determine if you might be subject to AMT this year.
Deductible contributions to retirement plans can also decrease your current tax liability. The 2014 retirement plan contribution limits are as follows: Traditional/Roth IRA ($5,500 under age 50, $6,500 age 50 and older), 401(K) and similar plans ($17,500 under age 50, $23,000 age 50 and older) and Simple IRA ($12,000 under age 50 and $14,500 age 50 and older). IRAs can be funded until April 15, but contributions to the other plans must be made by the end of 2014.
Notable changes for business owners to review include the number of tax provisions that have expired relating to business deductions. Fifty percent bonus depreciation on new assets placed into service during the tax year has expired, and the allowable Section 179 deduction has significantly diminished.
Congress may pass new legislation to renew these expired provisions, but it’s important to keep in mind they may modify the provision that was in effect for 2012 or they may not renew the provision at all.
If your decision to purchase a capital asset in 2014 is dependent on one of the expired provisions, you should be ready to buy as soon as legislation is signed into law as you may have just days to do so. Remember that assets must be placed in service by Dec. 31 to be depreciated.
New to the 2014 tax year are the final repair regulations that became effective as of Jan. 1. These repair regulations could significantly change the capitalization and expense policies of some businesses. Speak with your tax professional to discuss the impact these regulations will have on your business.
Scheduling a tax-planning meeting with your tax professional before the end of 2014 is the best way to ensure that you are aware of and understand how the current tax laws and pending legislation will affect your taxes.
Smart timing of income and expenses can reduce your tax liability, while poor planning decisions can increase your liability. You should begin organizing your 2014 information and communicate with your tax professional to make sure you are as prepared as possible for the upcoming tax filing deadlines.
Meredith Barfield is a member of the tax department at Hancock Askew & Co. She can be reached at mbarfield@hancockaskew.com or 912-527-2794.