10 Keys to Mid-Year Tax Planning for 2014
With the 2013 tax filing season now mostly in the rear-view mirror, it is time to focus on new tax planning opportunities for 2014. Traditionally, annual tax-saving strategies and transactions are best implemented in the final quarter of the year – for good reason. When a small business or individual taxpayer is able to summarize actual results for nine or ten months of their fiscal year, it is easier to estimate the remaining months of the year for income, deductions, and tax payments to be made. However, the reality of year-end planning is that often the “window of opportunity” to conclude those important tax moves is limited. Thus, an early start on planning can identify hot issues in advance of the end of year rush. Even with only a few months of activity to rely on, many financial trends and performance metrics can be established by mid-year.
Following are ten keys to mid-year planning for 2014. With summer vacation season around the corner, perhaps a bit of foresight may bear fruit in the form of tax savings later in the year.
- Know the New Tax Brackets – Effective in 2013, the American Taxpayer Relief Act (ATRA) raised the highest individual tax bracket to 39.6% for joint filing individuals over $450K in taxable income, and single filing individuals over $400K. Also, remember the new, additional Medicare tax on earnings of 0.9%, and the new phase-out of itemized deductions – both driving the effective individual rates even higher. Regular C Corporations with taxable income over $100K flatten out at 34%, unless you are a professional service corporation (PSC), which remains at 35%. These brackets bring focus to income shifting for small business owners, and especially pass-through entities such as S Corporations, LLC’s, and Partnerships.
- Monitor your Investments and Watch the Markets – Also effective with ATRA, capital gain and qualified dividend rates increased to 20% for higher income taxpayers, defined by the same income levels above. However, the new Net Investment Income tax of an additional 3.8% on investment income can drive the tax higher for investors. Keep an eye on your portfolio to evaluate the recognition of losses to offset gains before the end of the year.
- Adjust Withholdings and Estimated Tax Payments – With more than six months to go in 2014, adjustments made now can minimize surprises next March or April. Be clear on minimum required tax payments based on actual 2013 tax returns, to avoid penalties for underpayment of estimated taxes. Business entities, self-employed proprietors, and pass-through entity owners need to make assumptions about forecasted 2014 results, and then update again in the fourth quarter.
- Reduction in “S. 179 Bonus Depreciation” Limits – After years of generous deductions on new vehicle and asset purchases, ATRA reduced the expense deductions dramatically for 2014 – now down to $25,000 total for the year and a phase-out beginning at $200K. In prior years, small business owners could “go shopping” around the holidays to lower the tax bill, but this year tax benefits of asset purchases will be limited.
- New Asset Capitalization Rules – Effective in 2014, new regulations require businesses to establish policy for the capitalization of major outlays on property and equipment. Gone are the days of “writing off” major repairs; now new standards will be enforced by IRS. Plan ahead on expected costs of facility, property, and equipment purchases, upgrades, improvements, and repairs, to determine the tax treatment in advance.
- New Focus on Pass-through Entities (PTE’s) by IRS – Announced in 2012, the Service will raise the focus for audit efforts on S Corporations, LLC’s, and Partnerships and their pass-through owners. Much-improved matching to Schedules K-1 for income and deductions results in a new “accountability” for pass-through owners. “Basis” for gain or loss, excess distributions, passive or non-passive, and other K-1 reporting responsibilities will be scrutinized at the individual level. Get current and be accurate, and be sure to reconcile for each PTE.
- Retirement Plan Contributions – Now is a good time to think about potential retirement contributions – as an employer and also individually. Most 401(k) plans provide for an elective “profit-sharing” employer contribution, based on the census of all employees. Evaluate options at mid-year, so that cash flows can support higher contributions late in 2014 or early in 2015. Elective deferral contributions for 401(k) plans can be maximized for the year with payroll withholdings spread over many months. SEP and SIMPLE Plan contributions that require employer matching contributions should also consider cash flows to fund ahead of year-end. Maximum employee contributions vary by plan and for ages under and over 50 years.
- Determine Sales and Use, Payroll, and State Income Tax Requirements – The digital age has allowed state and county tax agencies to synch data from different departments, and then “match” taxpayers to ensure tax reporting compliance. Evaluate “business activity” in various jurisdictions, and understand the many requirements for tax and other reporting. Review employee information, changing sales and use tax rules, and potential new customers or jurisdictions to maintain control in reporting. Lastly, be aware of internet/cloud/digital reporting criteria – it is a fast-changing sector of the economy.
- Estate, Trust, and Gift Planning – When ATRA was enacted, it addressed the long-running drama of the Federal Estate tax exemption by raising the threshold for taxable estates. Now at $5.25M (subject to index adjustment annually), it is expected that only a fraction of federal estates will be taxable. For Maryland estates, the taxable inheritance level remains at $1M, so be aware of the different thresholds. Mid-year is a great time to sit down and review the values of family assets, and to review wills, beneficiaries, trusts, and gifting options. If legal documents need to be updated, the process may be helped with an early start for 2014.
- Affordable Care Act - The complexities of employer health insurance are best evaluated in advance of plan renewal dates, which are scheduled for late in the year. Now is a good time to discuss premium increases, coverage options, and employer policies so that expense budgets, personnel decisions, and cash flows can be anticipated for the coming policy year.
These “keys” are important to consider now, which will allow ample time to act later in the year. If possible, quantify the potential outcomes in a tax and cash-flow projection for the year, to be updated again before the holidays. Please seek the advice of your tax advisor before implementing tax strategies or transactions. Enjoy your summer!