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Year-End Tax Planning with Checklists

JesswebYear-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). These breaks include,

For individuals:

  • The option to deduct state and local sales on their itemized deductions
  • Certain deductions for qualified higher education expenses
  • Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older

For businesses:

  • Tax breaks that expired at the end of last year and may be retroactively reinstated and extended including 50% bonus first year depreciation for most new machinery

equipment and software

  • $500,000 annual expensing limitation
  • Research tax credit
  • 15-year write-off for qualified leasehold improvement property.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.
  • It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
  • 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.
  • If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
  • 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 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Businesses should consider buying machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby securing a half-year worth of depreciation deductions for the first ownership year.
  • Although the business property expensing option is greatly reduced in 2014 (unless legislation enhances this option for 2014), consider making expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
  • To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.
  • To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.

Jess Weaver

Jess Weaver

CPA at Ketel Thorstenson, LLP
Jess is originally from Spearfish, SD. He started working for Ketel Thorstenson in January of 2010 shortly after passing his CPA exam. Jess graduated from Black Hills State University with a professional accountancy degree.
Jess Weaver

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