Top 10 Tax Planning Tips
- Tax rates. The top 2014 marginal tax bracket is 39.6%, and the top rate for qualified capital gains and dividends is 20%. Try to avoid any large income swings that could push your incremental income into the higher tax brackets. If possible, spread the income between 2014 and 2015 in order to accomplish this.
- Net investment income tax. This additional 3.8% tax on net investment income, including capital gains, dividends, passive income, and potentially rental income, has been in place since 2013. The tax kicks in once modified adjusted gross income (MAGI) exceeds the $250,000 threshold for married filing jointly or surviving spouse returns; $125,000 for married filing separately returns; and $200,000 for any other filing status. If possible, strategize to keep your MAGI below these thresholds in order to avoid this extra tax.
- Additional Medicare tax. Like the net investment income tax, the Medicare tax has been in effect since 2013. This tax is another 0.9% on self-employment earnings in excess of $250,000 for married individuals filing jointly; $200,000 for single individuals and heads of household; and $125,000 for married individuals filing separately. In order to avoid having to pay this additional tax at year-end, consider withholding more from any W-2 earnings or make estimated payments throughout the year.
- Alternative minimum tax (AMT). If you are consistently in AMT, it is helpful to evaluate whether the cookie cutter year-end tax planning strategies would actually benefit you (e.g., prepaying state and local taxes). There are a few incredibly effective strategies to reduce your tax liability that you don’t want to pass up. Reach out to your tax advisor to see how you can take advantage of these opportunities.
- Maximize 401(k) contributions. Assuming you are in the top marginal federal tax bracket, contributing the maximum $17,500 to your 401(k) could reduce your federal tax liability by $6,930. The tax savings are further increased if you are subject to state income tax.
- Gifting. For 2014, every individual may gift $14,000 to an unlimited number of individuals tax-free. This means that you and your spouse could gift $28,000 to each individual tax-free, providing an excellent opportunity for you to transfer wealth to others without eating into your $5.34 million gift and estate exclusion.
- Depreciation. Bonus depreciation has expired for tax years after 2013. The Section 179 deduction limits have returned to $25,000 (down from $500,000) with an investment limitation of $200,000 (down from $2 million). With uncertainty regarding Congress’ extension of these 2014 depreciation deductions, it would be prudent to run several projections with scenarios that include bonus and various Section 179 limits.
- Repair regulations. The repair regulations are hundreds of pages of new tax law that provide more guidance on how to treat costs related to tangible property. These regulations could have significant tax planning opportunities, especially in regard to the de minimis safe harbor limits that allow deductions of up to $5,000 for companies with an applicable financial statement (AFS), or $500 for companies without an AFS. Having capitalization policies in place by year-end ensures that companies can take advantage of the safe harbor for 2015.
- Life changes. Different stages of life can significantly impact your tax liability. Whether it’s the birth of a child, employment changes, retirement, casualty losses, or business successes/failures, it’s important to keep in mind that these events could cause swings in your 2014 tax bill. Identifying what these life changes are will help you to more accurately estimate their impact on your tax return.
- Talk to your CPA. Being in contact with your CPA throughout the year helps to minimize surprises and maximize tax savings. Notifying your CPA about large upcoming transactions and your long-term goals will help them to provide options as you are making these decisions.
While these tips are a great place to get started, tax planning strategies should be tailored to your situation. If you are interested in receiving a more in-depth analysis or have additional questions, feel free to reach out to us. We would love to help you.
Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms, located in Lake Oswego, Oregon.