A tax planning question we often hear is: "I have a Schedule C business I report directly on my individual Form 1040. As I approach the end of the year, what are some tax planning ideas to save income taxes for 2013?" Let's answer that question.
Tax planning can be complex due to the ever changing tax laws introduced each year. However, some fundamentals remain the same even as taxes, credits and deductions are modified. A few ideas for you:
- If your business is on the cash basis, you can postpone income until 2014 and accelerate expenses into 2013 to lower your 2013 tax liability. Besides reducing your tax liability, you may also increase other credits and deductions.
- If you need to purchase business equipment, it may be wise to do so in 2013 instead of waiting until next year. Certain depreciation tax breaks are set to expire at December 31, 2013. Therefore, you may want to buy fixed assets in 2013 vs. 2014, as you may not get as much benefit for the purchase next year:
- Section 179 fast depreciation is presently allowed up to $500,000, but will decrease to $25,000 for 2014.
- 50% Bonus Depreciation for new first-year property will be eliminated in 2014.
- Consider using a credit card to prepay expenses that can generate deductions for this year. The credit card balance can be paid in January 2014 to avoid any interest charges.
- To help fund new healthcare legislation, there is a new 3.8% surtax on unearned income (interest, dividends, capital gains, rent, passive pass-through income) and an additional 0.9% Medicare tax that applies to individuals receiving wages in excess of $200,000 ($250,000 MFJ). Depending on your circumstances, you may want to find ways to increase/decrease your wages/unearned income for 2013 vs. 2014.
- Depending on your situation, you should try “bunching” your itemized deductions into one year (i.e. pay winter property tax bill in January 2013 and December 2013).
- For individuals, some tax breaks are set to expire at the end of the year and may or may not be extended. For example, the above the line deduction for qualified higher education expenses and tax-free distributions by those age 70 ½ or older from IRAs for charitable purposes. If either tax break applies to you, you will want to make sure it is done in 2013 vs. 2014.
As with all tax planning, the best way to save taxes is to have level income over the years and to avoid spikes in income or losses.
Through proper year-end planning, we can help you determine the best strategy for you. Please contact us at (616)642-9467 if you have any questions regarding your tax situation.
For more helpful accounting resources, check out our how-to guides, checklists and worksheets.
