Reduce tax obligations through tax planning

To reduce your tax obligations this year and next, start planning now!

Last year was plagued with tremendous uncertainty as all awaited last minute tax legislation.

This year, we are faced with a host of new laws, limitations and phase-outs, and tax rates.

To complicate matters further, we continue to anticipate additional changes to tax law as a result of the current Congressional budgetary conference committee, the results of which are expected to be released by December 15, 2013.

Time for Planning

Since the extension of beneficial tax policies, such as bonus depreciation and deductions for state sales and use tax, as part of any new legislation is still unknown, tax planning should be conducted under current law (i.e. assuming those provisions will expire as of December 31, 2013).

While many advisors default to standard suggestions to reduce cost for a single year, a more meaningful tax strategy seeks to create a plan to address the current year and the next one to reduce tax liabilities for both.

Effective planning allows the filer to defer taxable income and accelerate deductible expenses and losses. As such, business owners and individuals are advised to consider a deliberate and aggressive year-end tax planning approach.

A key point to consider is thatplanning is critical to minimize individual and company taxes. While some equate “tax season” with March and April, it really starts – or at least should start – in November.

The First Step

The best year-end tax planning begins with a consultation to determine an estimate of your personal and business income, expenses, assets and liabilities based on year-to-date numbers, plus estimates for any additional income, losses or transactions through the end 2013. After a projection of the same for 2014 is calculated, your tax liability can be estimated for federal, state and alternative minimum taxes for both years. This is where the opportunities for tax minimization live.

Your Unique Requirements

Many strategies – legal and ethical – exist that can minimize taxes over time, but what is most important is that the strategies chosen consider the unique situation of the filer. We can determine if you will benefit from reducing taxable income in the current year or if that might substantially increase your taxes for next year.

For instance, if you are expecting a $20,000 bonus in late 2013 or early 2014 and are in the middle of the 25 percent tax bracket for 2013, but you expect to be in the 39.6 percent tax bracket in 2014, you would save $2,920 by taking the bonus in 2013 instead of 2014. You would pay $5,000 more in 2013 ($20,000 X 25 percent) but save $7,920 in 2014 ($20,000 X 39.6 percent). If you were already in the 35 percent tax bracket in 2013, then you would save $920 in taxes by taking the bonus earlier.

In creating a customized tax plan, we consider your answers to a number of questions.

How close are you to the next higher or lower tax bracket this year and next?
Are you expecting any life changes (e.g. marriage, divorce, retirement, babies, etc.) in the current or coming year?
What types of income and expenses (e.g. wages, interest, dividends, capital gains, passive, itemized deductions, business losses) do you have?
Do you have or expect to have any unusual income or expenses (e.g. sale of property, debt forgiveness, bad debt from a customer or client) in 2013 or 2014?
Do you have any unused carryovers (e.g. net operating losses, capital losses, charitable, passive losses, at-risk basis limitations, investment interest expense, credits) from earlier years?
How much have you already contributed to your deductible and non-deductible retirement accounts like IRA, Roth, SEP, Keogh, HSA, etc.?
Can you benefit from any expiring tax laws?
Do you need any new business equipment? How much business equipment have you added in 2013?
Do you plan any major purchases or additions (e.g. boat, plane, auto) personally?
If your pass-through company has losses in 2013, do you have sufficient basis left to benefit from those losses?

Checking your current and next year estimates and projections against the factors above can identify opportunities to reduce your total income tax burden.

Great tax planning is not about picking five “tried and true” tax strategies and applying them. It is about analyzing your personal situation, which includes your unique tax and financial attributes, to find solutions that best suit your needs.

For example, suppose you have a minority interest in an S corporation, which is normally a “passive activity” to you, but this year you have been more involved trying to turn losses into profits. If you have already spent 400 hours working at it – and a log to prove it – we might recommend that you spend another 101 hours before the end of the year so that you meet the rules for “material participation” in 2013. If you have sufficient basis, you are entitled to immediately benefit from the pass-through of the loss. If you do not have sufficient basis, we might suggest that you lend or contribute money to the company in 2013 instead of waiting for 2014. And depending on any prior passive losses, if the activity is profitable this year, we may recommend increasing your hours of participation so that you are not subject to the new 3.8 percent tax on investment income.

Many standard tax reduction concepts exist, and you have likely heard them before. They include the right to harvest capital losses if you have capital gains; place new equipment in service before year-end and claim bonus depreciation; and bunch your itemized deductions if you are on the borderline between itemizing and claiming the standard deduction each year.

What these strategies are missing is an appreciation for your unique personal and business situation – and that appreciation is the difference between filing taxes and developing an effective tax plan.

About the author: Teri Kaye, CPA, is Partner-in-Charge of Tax in the Fort Lauderdale office and has more than twenty years of experience in public accounting in domestic and international tax, compliance, planning and structuring. Teri focuses on tax solutions for individuals, corporations and other organizations. Her expertise includes tax consulting, planning, and structuring for individuals and companies interested in acquiring businesses or property. In addition, Teri has significant experience in state and local tax (SaLT) matters, and representing clients in examinations and inquiries before the Internal Revenue Service, Florida Department of Revenue, U.S. Department of Labor, and other state tax and regulatory agencies. You may contact Teri at 561-886-5262 or email tkaye@dbllp.com.