As we near the end of 2013, it is time to consider some tax planning opportunities. With all of the changes taking effect for businesses and individuals, many tax returns will look different than they have in prior years. Consider the following summary of items to prepare for the law changes as well as to take advantage of some opportunities.
Individuals
Net Investment Tax
Beginning January 1, 2013, single taxpayers will be subject to an additional 3.8% tax on the lesser of their net investment income or their modified adjusted gross income in excess of $200,000 ($250,000 if MFJ, $125,000 if MFS). Net Investment Income includes taxable interest, capital gains, dividends, annuities, royalties, rents, and passive business income. Some strategies that may help mitigate this additional tax include:
- Harvesting capital gains and/or losses
- Investing in municipal bonds
- Contributing to non-deductible IRA and rolling over into Roth IRA in order to benefit from tax-free growth
IRA Tax-Free Charitable Contributions
Through the end of 2013, IRA account owners age 70½ and older who are required to take IRA distributions may transfer up to $100,000 tax-free to charity. This provision allows retirees to avoid paying income tax on amounts withdrawn and can be used to satisfy IRA required minimum distribution rules. Individuals that are required to take distributions, are charitably inclined, and would like to reduce their income tax liability, should consider this opportunity.
Saver’s Credit
The Saver’s Credit is a refundable credit available through the end of 2013 for low and moderate income earners that make eligible contributions to an IRA or employer-sponsored retirement plans. In order to qualify, the taxpayer must be 18 or older, not a full-time student, not claimed as a dependent on another person’s return, and have adjusted gross income of under $29,500 ($59,000 if MFJ, $44,250 if HH). The credit ranges from 10% to 50% of the eligible contribution, with a maximum contribution of $2,000 per individual. If within the income limitations of this provision, look into making a retirement contribution in order to reduce overall tax liability and take advantage of this credit while it is still available.
Businesses
Bonus Depreciation and Section 179 Election
As many of you know, bonus and section 179 depreciation provisions have been extended in the past, however currently the following changes are set to take effect during 2014:
- 50% bonus depreciation available in 2013 for new, qualifying assets will only be available for “certain aircraft” and “longer production period property” in 2014
- $500,000 section 179 expense deduction with dollar-for-dollar reduction for annual qualifying purchases exceeding $2,000,000 is scheduled to decrease to $25,000 with reductions for purchases exceeding $200,000 in 2014
A key planning consideration should be to accelerate asset acquisitions into 2013 in order to take advantage of the 2013 limits before they decrease in 2014.
Interest Charged – Domestic International Sales Corporations (“IC-DISC”)
US operating entities that are selling US-manufactured products outside the US can reduce their US tax burden through the use of an IC-DISC. In short, an IC-DISC can be beneficial because it allows a US operating entity to obtain a deduction against ordinary income for commissions paid to an IC-DISC, while the owner(s) of the IC-DISC recognize income for the same amount, but in the form of a dividend which is taxed at preferential rates. The IC-DISC is a tax-exempt entity and pays no federal income tax on the commission it receives from the US operating entity. Since the dividend rate is currently 15% (20% for individuals earning more than $400,000 ($450,000 if MFJ)), IC-DISCs should continue to be given consideration for the potential tax savings they yield.
Tangible Property Regulations
The following changes are optional for 2013 and mandatory for 2014:
- Repair vs. Capitalization: Definition of when a repair is required to be capitalized has been updated to be more taxpayer friendly, and as such, there may be items capitalized in prior years that can be written off by filing a change of accounting method in the current year
- Treatment of Materials and Supplies: Under the new regulations, a taxpayer may expense materials and supplies in the year paid or incurred under a de minimis rule, resulting in the potential acceleration of deductions
- De Minimis Rule: Taxpayers may elect to deduct de minimis amounts paid or incurred to acquire or produce a unit of tangible property if they have an applicable financial statement, written accounting procedures for expensing amounts paid or incurred for such property under certain dollar amounts, and treat such amounts as expenses on their applicable financial statement in accordance with their written accounting procedures
- Disposition of MACRS Property: For assets that have been disposed of, but never written off because they were part of a larger asset, the new regulations allow a taxpayer to elect to immediately take the loss deduction for the disposal by filing a change in accounting method
Taxpayers should review fixed asset schedules and company repair and capitalization policies to determine what changes should be made to take advantage of these rules by accelerating deductible items.
