Tax season may be long forgotten for most taxpayers. After all, it’s been at least two months since the filing deadline, and the extension deadline is nearly four months away. Despite the distance from the deadlines, mid-year is an opportune time to review your tax situation. Not only will your C.P.A. likely have time to answer the phone, but there is time to make changes to improve your tax situation.
Consider having your tax adviser run a projection to see if you may be subject to the alternative minimum tax. The alternative minimum tax (AMT) is a recapture mechanism, reclaiming tax breaks allowed by the IRS. Because there is no specific test for AMT, you must first figure your regular income tax, and then determine whether tax benefit items must be added back to your taxable income to calculate AMT. Without these items added back, some taxpayers might be able to escape income tax entirely.
Medical deductions, itemized tax deductions, home mortgage interest, miscellaneous itemized deductions, personal exemptions, standard deductions and incentive stock options can cause the average taxpayer to be hit by AMT. If you and your tax adviser project you will have an unusual amount of deductions during the year that could trigger the AMT, you may look to postpone non-critical medical treatments to push deductions into a year when AMT may not apply. You may also consider capitalizing taxes on unproductive real estate or negotiating an accountable reimbursement plan with your employer to minimize business expense deductions.
Even if AMT is not a concern, a mid-year review can help you avoid penalties for underpayment of estimated taxes. Sole proprietors and owners of pass-through entities should revisit their 2014 revenue forecasts before the fourth quarter and there is little time to change your tax situation. You should not be penalized if you pay at least 90% of your current tax liability or 100% of the previous year’s tax liability, 110% if your adjusted gross income is more than $150,000.
Additionally, the IRS has greatly improved their matching of income and deductions to Schedule K-1 forms, so individual returns could be examined for gains, losses, excess distributions, and passive or active income reporting. Make sure your tax adviser is aware of all pass-through entities with which you are an owner or shareholder.
Finally, most taxpayers can affect their tax situation by maximizing contributions to their retirement plans as this reduces your taxable income. For 2014, you can contribute up to $17,500, or $23,000 if you’re 50 or older, to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan. You can contribute up to $5,500 to a traditional IRA, $6,500 if you’re age 50 or older; however, the tax deduction for contributions to an IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000. The phase-out begins at $96,000 for married filing jointly if the spouse who makes the IRA contribution is covered by a workplace retirement plan. While you can make 2014 IRA contributions up until the April 15, 2015 tax filing deadline, the longer your money is invested, the more compounding should work in your favor.
Businesses need to be acutely aware that Congress let the increased limits for the Section 179 expensing deduction revert to the considerably lower level of $25,000, subject to a $200,000 phase-out limit. That’s right. Section 179 expensing dropped from $500,000 to $25,000. Additionally, there is no 50% bonus depreciation this year either. Business owners may want to “wait and see” before making big purchases. Assets purchased in 2014 will have a higher basis; therefore, businesses can reap depreciation expenses in later years.
Congress could pass some laws that retroactively reinstate the higher limits, as the House voted late last week to extend a handful of tax laws, which included making the Section 179 expensing provisions permanent. However, the bill still has to pass the Senate, and the White House has expressed disagreement to making the provision permanent. Considering it is an election year, it is likely we will not see any final votes until after November.
Meanwhile, what is a business to do to improve their tax situation? Consider cleaning house. Like individuals, businesses can donate property or business inventory to federally-approved 501(c)(3) organizations for a tax deduction. Donations are evaluated and deducted based on their fair market value. The property must be in good condition to qualify. Many organizations provide guidelines for establishing the fair market value of used property. Deductions are generally limited to 50% of adjusted gross income for individuals, partnerships and S corporations, while C corporations are limited to 10% of taxable income.
Business owners may also consider installment sales of property or real estate. Instead of receiving full payment at the time of the sale, the business would receive payments over the course of several tax years; therefore, deferring the taxation of a portion of the income and capital gain to later years. An installment sale may help a business owner sell his business more readily. While the installment sale treatment is automatic, businesses should consult a C.P.A. and attorney to ensure the sale is structured correctly to account for interest charges that may apply and that gift tax liability isn’t incurred for property that sold for less than its fair market value.
Moreover, businesses should make a mid-year examination of the areas where the IRS is focusing their audits: the taxation of tips and service charges; the misclassification of employees as independent contractors, and issues commonly encountered with pass-through firms, like S corporations, partnership and sole proprietorships—especially if the business is a cash-intensive business.
As of Jan. 1, 2014, business owners also have to contend with new regulations governing when they must capitalize and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible property, meaning business cannot just “write off” major repairs. While the regulations are more taxpayer friendly, retail, manufacturing, hospitality and utility industries are particularly affected.
Business owners should make an appointment with their C.P.A.s to make sure they are on track with their taxes this year. At mid-year, business owners can still make adjustments to prevent any surprises when their returns are due.
At Henssler Financial we believe you should Live Ready, and that includes controlling your tax situation year round. If you have questions regarding your tax situation the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at firstname.lastname@example.org.