Here are a few thoughts on some last minute tax planning moves.
There are a few avenues that make paying less tax a lot less difficult; business ownership and investment ownership (including home and rental property ownership).
Simply put, our tax system rewards business owners and investors and saps the self-employed and the highly paid employees. However, for W-2 employees who are not investing and who do not have a small business in the family, we have a few options for you too.
Generally, for all of us, the most widely adopted tax strategy is to postpone income until 2014 and accelerate deductions into 2013 thus lowering your 2013 tax bill. This strategy may also help you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2013.
For Business Owners:
- Pay your Business excise and your annual report fees to the Department of Revenue and to the Secretary of State in advance; that is about as easy as it gets except for buying that new tool chest for your work truck or android tablet for client meetings (see #2).
- I hate to suggest spending to save, but in some instances it just makes sense to buy things you were already going to purchase before the end of the year. Pay for online services (Software as a Service) or regular software that you are going use for the business next year (e.g. Rackspace or Dropbox). You often can get a price discount and a needed tax deduction for something that is going to help you make money all year.
- Similarly, If you are considering a BIG purchase (e.g. a shiny new excavator) you can take a full deduction this year using section 179 up to $500K to zero out your landscaping company income (you cannot create a loss this way but you can carry all of the unused loss forward); next year the limit is supposed to drop back down to $25k max.; Unlike 50 or 100% bonus depreciation, the property does NOT need to be new.
- Make the retail and leasehold improvements to your spaces now so that they will be eligible for accelerated depreciation.
- Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won't be available for workers hired after this year.
- If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
- Pay your estimated tax payments on the personal side for business owners with flow-through entities and self-employed people.
For Property owners:
- Make rental improvements and buy the furnishings that will make your tenants more comfortable. They will love you for it and you get a tax break.
- Pay your property tax and your estimated state taxes before year end.
- Pay your accountant now to do your books for you later.
- Consider selling your loser stocks to take the losses, then buy them back after 31 days to recover the position. Maybe hedge with an option to buy it back where you left it…
- Consider donating your appreciated stocks to charity instead of cash. You can write off the market value and not pay and capital gains.
- Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock as long as you hold it for five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met.
- Depending on your particular situation, you may want to consider deferring a debt-cancellation event until 2014, and disposing of a passive activity to allow you to deduct suspended losses.
- Try to get your employer to pay your bonus after year end.
- Contribute to your Health Savings Account or Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- There may still be time to convert your traditional IRAs to Roth IRAs if you had a tough year of laid off years.
- Pay your college tuition now instead of January, especially if you are married and your spouse is working.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.