Common strategies to consider
By Jim Smith
Your personal and business situation will dictate your tax planning, and your tax professional can help you determine which strategies are best for your needs. However, there are some common strategies that every business should consider.
- For most people, tax-deferred retirement savings never go out of style. With a top tax rate approaching 44 percent, not including state income taxes, contributing to a tax-deferred retirement plan will save you up to 44 percent in current taxes, allowing you to invest that money until you retire and likely receive distributions at a much lower tax rate.
- Investment income is now subject to a 3.8 percent surtax if your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing a joint return. If you have substantial investment income, consider adjusting your investment strategy to include more tax-exempt bonds, as tax-exempt interest is not subject to the surtax. Long-term capital gains are taxed at 15 percent for most taxpayers and 20 percent for taxpayers with taxable income of more than $400,000 for a single filer or more than $450,000 for joint filers. The surtax is added to these rates, making top capital gain rate 23.8 percent. Therefore, if you have a choice as to when to recognize capital gains, first determine if you will be subject to the surtax and/or the 20 percent rate for higher income taxpayers in 2013 and 2014. Then you can decide whether to take the gain in this year or next year. You can also harvest any capital losses to reduce the impact of the surtax and higher tax rates.
- If you are old enough to collect Social Security but have not yet started doing so, consider delaying benefits to keep your income below the surtax levels. This has a double benefit in that, for each year you defer the benefit, you increase the amount you will eventually receive. However, this option should be analyzed with more than just taxes in mind.
- Owners of pass-through businesses should look at 2013 and 2014 tax years together. Section 179 allows a business owner to write off the cost of new equipment in one year, subject to limits, which offers several planning opportunities. First, if 2013 is a high-income year, the business could accelerate the planned purchase of new equipment from 2014 to 2013 to take advantage of this deduction. Second, if 2013 taxable income is expected to be below the surtax level, or above that level but below the new higher tax rate levels, consider not taking the Section 179 deduction in 2013 to increase future depreciation deductions. The Section 179 deduction is a flexible deduction, so the business can elect to claim it on only part of its 2013 acquisitions to allow the owner to keep 2013 income below the desired levels and save some depreciation expense for 2014 and beyond.
- Pass-through businesses also have the option of taking the 50 percent bonus depreciation on qualifying new property, so the same planning mentioned above for Section 179 should be performed to decide if bonus depreciation should be taken. Both the Section 179 deduction and the bonus depreciation decision are made at the entity level, so this planning should be performed before returns are completed and filed.
- If you own real estate, you often have choices about in which year to pay property taxes. This decision is complicated by the alternative minimum tax and the phase-out of itemized deductions on higher-income taxpayers. As expressed above, this calculation should include both 2013 and 2014 to determine the maximum benefit.
- Charitable contributions are another way to reduce your taxes. However, some taxpayers have a much more beneficial way to contribute to charity than others. Assuming you are a taxpayer with taxable income of more than $450,000, giving $100,000 cash to a charity could save you approximately $40,000 in taxes. However, if you have a stock that you have held for more than one year with a value of $100,000 but a tax basis of only $50,000, contributing this appreciated security instead of cash would give you a double benefit. First, you would save the $40,000 in current taxes the same as if you had given cash. Second, when you sold the security, you would owe the 20 percent tax on the capital gains, plus the 3.8 percent surtax, for a total of $11,900. By contributing the security instead of cash, you save this additional tax.
The primary key to tax planning is the word planning. Meet with your tax professional before year-end to allow yourself time to analyze these and other ideas to determine what is right for you.
Jim Smith is a partner at Lane Gorman Trubitt PLLC. Contact your trusted LGT advisor for more information at (214) 871-7500.