Year-End Tax Planning Considerations

It’s hard to believe that the end of 2013 is upon us.  If you haven’t started or finished already, now’s the time to begin or continue addressing tax planning for the upcoming filing season.

Out of the recent turmoil on Capitol Hill came significant tax changes for businesses and individuals, such as an increased maximum individual tax rate, along with a new Medicare and net investment tax for higher-income taxpayers, health care reform requirements, increases in capital gain rates, and permanent estate and gift changes to name a few.  Mix these changes in with traditional year-end planning considerations and the looming expiration of many tax provisions, and you have a formidable task in planning for 2013 and future years.  Although I can’t discuss all of these changes and planning considerations, I will discuss some of the highlights.

Make sure to understand the health care reform requirements that apply to you.  For businesses, the “pay or play” mandate, along with other reporting requirements for employers with more than 50 full-time equivalents has been delayed until 2015, giving you more time to plan.  There are also small employer health insurance credits you may need to investigate if your company doesn’t have more than 25 full-time equivalents and doesn’t pay employees average annual wages greater than $50,000.  For individuals, the requirement to carry minimal essential coverage or qualify for an exemption to avoid a tax penalty begins January 1, 2014.  These penalty rates increase over the next few years too.  These are just a few examples of items you should consider.  With health care reform, expect more changes to come, not less.

Does the increased maximum individual tax rate, increased capital gain rates, and/or new Medicare and net investment tax provision impact you personally?  All of these new provisions apply to higher income individuals, and the thresholds are widely published by the IRS.  Talk to your tax professional sooner than later as there are tax planning techniques such as utilizing capital loss carryforwards, income spreading and shifting, grouping business activities, or harvesting capital losses from investments you hold that can be used in these situations.  However, the best course of action depends on your individual situation.

Take advantage of special business tax provisions that are set to expire.  For example, Code Section 179 limits have been enhanced in recent years, but are scheduled to revert back to the prior low levels in 2014.  For 2013, the expensing limit is $500,000.  Code Section 179 expensing essentially amounts to an accelerated depreciation deduction, so instead of writing your capitalized property off over a number of years the IRS sets, you can write it off fully (with limitations) in the year you purchased it.  In 2014, the limit is scheduled to drop from $500,000 to $25,000.  Another similar provision set to expire in 2014 is bonus depreciation, which is different than Code Section 179.  In short, bonus depreciation generally allows for a 50 percent deduction in the year of acquisition for qualifying property.

The Research Tax Credit is set to expire…again.  Although this business related credit has significant bi-partisan support in Congress, the Obama administration, and the business community, the estimated revenues cost to our Government is $14.3 billon.  Because of this, don’t expect any permanent laws to be set.  Instead, expect another one or two year extension.  These provisions all have very specific rules that need to be adhered to and can limit the deductions, so once again consultation with your tax professional is a must.

Consider other traditional planning techniques such as gifting property to designated recipients prior to year-end, entering into installment sale contracts, making (or not making) charitable contributions before the end of the year, fully funding retirement accounts, considering Roth IRA conversions, paying or postponing various other expenditures either in this tax year or defer to next tax year, etc.

Have a clear understanding of what your tax liability looks like for 2013, and what related payments you have made through withholdings, estimated payments, or both.  This is a very generalized way of saying to have a tax projection prepared.  If you do not make appropriate payments during the year, the IRS can assess you with underpayment of estimated tax penalties.  Also, if you extend your personal tax return by April 15, 2014, and you haven’t paid enough to cover all of the tax you owe, they will assess you with another penalty.  Many different things can impact your income tax liability such as significant transactions in your business, life changes such as the birth of a child, change in a child’s age, moving/relocation, marriage or divorce, college and tuition, asset sales or disposals, retirement, foreclosure or short sale…(this list could go on and on).  So much of what we do on a day to day basis has an impact on our tax situation.  A simple way to avoid significant issues and stay in the clear is to meet regularly with your tax professional.  I generally meet with clients on a quarterly basis to stay abreast of any significant transactions, business changes, personal changes, etc.  This allows for both planning and execution to happen in advance of crisis situations.

I do believe that our elected officials on Capitol Hill will extend some, if not many, of the business and personal tax extenders and credits set to expire.  However, I don’t have a crystal ball and with the current gridlock it is likely they won’t be able to get to all of them or will just once again create a bunch of temporary patches.  Sit tight and enjoy!

With everything said above, realize that every taxpayer’s situation is unique and a year-end planning strategy, whether for an individual, family, or business, should be customized in consultation with a tax professional.  I apologize for the repetition, but I can’t stress it enough.  I’ve seen too many situations of people wishing they had taken the pro-active planning approach after they have been through terrible tax situations that took a significant financial and personal toll.  Don’t let it happen to you!

Chris Itzen, CPA, CGMA, is the founder of Itzen Financial, a full-service CPA and business consulting firm that helps clients in the areas of tax, accounting, business process outsourcing, strategy and performance, auditing, and financial advisory.  If you’re not already on the site, you can find out more about Itzen Financial and Chris’s blog at