Suggested Year-End Procedures
- If you own a S corporation and paid medical premiums for yourself and/or your family, make sure the cost of the premiums is added to your W-2 wages and is also reported in Box 14 on your W-2 as S Corp medical. These premiums don’t increase your FICA or Medicare taxes.
- S corporations should normally pay a reasonable salary to owners. Reasonable means paying a wage that is similar to what you would pay an outsider for equivalent work. Since pension contributions that are permitted are based on salaries paid to owners, paying too low of a salary limits deductions for pensions, such as to a Self-employed pension plan.
- S corporation owners, after paying a reasonable salary to owners, can distribute other profits to themselves, recorded in the books as “non-dividend” distributions.
- For all taxpayers, pay your 4th quarter estimated taxes by 1-15-2014.
- For all taxpayers, make sure you have paid in all of the taxes you expect to owe on your individual tax returns, whether via salary withholdings, estimated tax payments or extension payments by April 15, 2014. If you fail to do this, you will owe an extra and heavy “failure to pay” penalty.
- For all business owners, strive to complete your bookkeeping for 2013 no later than March 1, 2014 so you can timely file your tax returns and/or pay the correct amount of your final tax payments for 2013.
- If you do business or live in a state(s), like California, that has state-level estimated tax payment requirements, make certain you have paid in the appropriate taxes.
- Contact Bear Lake Tax & Accounting early if your tax returns will need to be extended to arrange for an extension filing, unless you will file the extension(s) yourself. We are not responsible to make sure extensions are filed without your specific written authorization.
- If you have created a new company(ies) this year, make certain you have informed us of the pertinent details. Make sure S corporation elections or an entity classification election (C Corporation) are timely filed for these new companies if desired.
- Post key corporate documents (partnership agreements, LLC agreements, articles of incorporation, etc.) to share file, including tax election forms and IRS acceptance letters.
- Contact Bear Lake Tax & Accounting to arrange for an appointment to have your tax returns completed. (Requesting completion of returns at the last minute does not promote timely or thoughtful completion of returns, or constructive feedback with planning suggestions.)
- Make sure all 2012 book to tax return adjusting entries are recorded in your books with a December 31, 2012 date (for calendar year companies). These are entries needed to book tax depreciation expense and other tax return adjustments. The entries are normally provided in the tax return work papers. If you can’t locate these entries, please contact us.
Overview of Tax Law Changes
This year Congress did not pass any year-end legislation to extend favorable tax deductions and credits. Given the upcoming 2014 elections, whether Congress will pass any meaningful tax reform in 2014 is an open question.
This political situation may mean that taxpayers can’t count on continuation of favorable tax benefits, such as the 50% bonus depreciation deductions or the high Section 179 expensing limits. So before the end of 2013 is likely the best time to acquire that needed vehicle or expensive machine you have been thinking of getting.
Tax laws passed previously are changing the 2013 tax landscape considerably, compared to 2012. The negative tax increasing aspects of the law changes affect mostly high income taxpayers. The changes include the increase in the highest income tax bracket from 35 to 39.6 percent (taxable incomes in excess of $450,000 for joint filers); the increase in the highest capital gains tax rate from 15 to 20 percent (23.8% with the net investment income tax); the new 3.8 percent net investment income tax and the 0.9% Additional Medicare tax on higher levels of compensation ($200,000 and above for single individuals and $250,000 for those filing jointly). These changes are combined with the return of increased restrictions on the full use of certain itemized deductions and personal exemptions (AGI over $300,000 for joint filers).
If you are a high income taxpayer, it is particularly important to validate that you have paid in enough in estimated taxes this year. The law changes also cause 2013 planning to focus on ways to reduce taxable income. Increased income tax withholding on wages in the final payroll of the year may be a way to reduce a potential estimated tax penalty, but a W-4 form must be submitted to your employer to accomplish this.
The 2013 AMT exemption amount was “patched” or fixed in the American Taxpayer Relief Act at $80,800 for 2013 and $82,100 for 2014 (married filing jointly). For high income individuals, reducing taxable income by prepaying taxes is counterproductive since taxes are an addition to income subject to the AMT tax.
Expiring tax benefit provisions that may not be renewed in 2014 include: the deduction for state and local sales taxes in lieu of state and local income taxes, exclusion of cancellation of debt income on principal residence debt, the mortgage insurance premium deduction, and tax-free IRA distributions up to $100,000 for individuals age 70 ½ or older.
The threshold for the deduction of medical expenses has been increased to 10% of AGI for those under age 65.
Same sex married couples will now be treated as married for Federal returns, but may still have to file as single taxpayers, depending on applicable state law.
Some Tax Saving Strategies
- Make sure you have a valid log of your business vs. non-business miles; plan trips to maximize business miles. You log can be a sample of the year, instead of the whole period. You can reconstruct at least part of your business miles by using google maps and looking at your business expense receipts, your calendar that documents business activities, etc..
- Donate appreciated stock investments to charity.
- Get an appraisal of donated non-cash property if single items are more than $500 in value. Make sure you get a written contemporaneous receipt from each charity for cash donations.
- Learn about and consider whether you are eligible for the home office deduction. Summarize payments for all operating costs related to your home for your tax preparer. Plan to maximize the office space you use regularly and exclusively for a business in your home.
- Claim the real estate professional status if you are eligible. But be careful, this is an IRS audit focus area. See the attached article on the requirements.
- Decide on and fund a pension plan for each of your business activities. Some of these need to be established by the end of the tax year. A solo 401-K is good for a business owned by a husband and wife where they are the only employees. A self-employed pension (SEP) plan is good for many of our clients. Other options to consider include a regular IRA contribution or Roth IRA contribution, including contributions on behalf of children who work in your business. You have until 4-15-14 to fund these pensions, and in some cases can fund them up until 10-15-14 if you extend the filing of your individual tax returns.
- If you own a S corporation and paid medical premiums for yourself and/or your family, make sure the cost of the premiums is added to your W-2 wages and is also reported in Box 14 on your W-2 as S Corp medical. These premiums don’t increase your FICA or Medicare taxes. Following these procedures makes you eligible to deduct the cost of the medical insurance.
- If you and your spouse both work in your business, and pay for child care of a child under 12 so you can work, make sure you both have income from your business so you are eligible for the child care credit.
- If you are eligible to make a Roth IRA contribution, don’t pass the opportunity up. This can create a tax free asset for both you and your heirs.
- Consider converting a regular IRA to a Roth IRA, especially if this is a low income year and you have cash to pay the resulting taxes.
- Consider the potential merits of establishing a C corporation to reduce the marginal tax rate on a portion of your business income. Discuss this with us. The optimal taxable income of such a C corporation may be about $50,000, assuming the business can be properly structured to accomplish this.
- If you have a profitable proprietorship, consider establishing a LLC with S corporation status as the business entity for this business activity.
- If your business is a cash basis taxpayer, consider delaying billing for the last revenues of the year.
- Buy equipment and vehicles this year, instead of next year. Stock up on office supplies. Consider paying bonuses this year to your employees.
- Harvest losses on securities you own to offset gains experienced during the year.
- In summary, if you want to reduce your taxable income, think of ways to reduce this year’s taxable income by accelerating deductions and deferring income.
- According to the IRS, “Most individuals and many small businesses use the cash method of accounting.” Under the cash method of accounting, “you include in your gross income all items of income you actually or constructively receive during the tax year.” Similarly, “you deduct expenses in the tax year in which you actually pay them…. However, you may not be able to deduct an expense paid in advance. Instead, you may be required to capitalize certain costs.” (Quotations are from Publication 538, Accounting Periods and Methods.)
- If you can do so, delay taking social security until at least your normal retirement age, and strongly consider delaying taking it until age 70 to help protect your old age income and income available to your spouse after you die (advice applies to the higher income spouse). Of course, this advice must consider other factors such as your health and probable death date.
For more detailed and advanced tax planning tips, please carefully review the guide prepared by the large CPA firm, Deloitte. Let me know if you would like to discuss any of these matters in more detail.
[button style=”large orange embossed” link=”https://bearlaketax.com/wp-content/uploads/2013/12/The-2014-Essential-Tax-and-Wealth-Planning-Guide4422.pdf” ]2014 Essential Tax Planning Guide[/button]
For important information about Rental Real Estate review the “Higher Stakes for Tax Treatment of Rental Real Estate” document.
[button style=”large orange embossed” link=”https://bearlaketax.com/wp-content/uploads/2013/12/December-2013-Article-on-REP-Test-and-Interaction-with-Investment-Income.pdf” ]2013 Rental Real Estate Information[/button]