As we are in the midst of planning our Thanksgiving dinner, preparing our Black Friday shopping hit list and deciding on what to give as holiday gifts, year-end tax planning is the last thing on our minds.  Now is actually the perfect time to get a good idea of your taxable income and tax liability for 2013 and more importantly find ways to reduce your tax liability to avoid any surprises next April.

Several tax law changes took effect in 2013 that potentially could increase your tax liability.  The American Taxpayer Relief Act of 2012 (ATRA) added a new 39.6% tax bracket and increased the long term capital rates from 15% to 20% for higher income taxpayers.  The Patient Protection and Affordable Care Act (PPACA) also introduced new taxes, including a new 3.8% surcharge on investment income and an additional Medicare tax of 0.9% on certain earnings.

With the new taxes and new tax rates there are several tax planning opportunities and strategies available to take advantage of for your personal tax situation:

• Maximize your retirement plan contributions

• 401(k)/403(b) plans - contribute up to $17,500, pre-tax.  Individuals over age 50 are eligible to make an additional $5,500, pre-tax, catch up contribution.

• Traditional IRA plan – contribute up to $5,500.  Individuals over age 50 are eligible to make an additional $1,000, catch up contribution. The traditional IRA contribution will be deducted on your tax return as a reduction to your Adjusted Gross Income (AGI).

• SIMPLE IRA – contribute up to $12,000, pre-tax. Individuals over age 50 are eligible to make an additional $2,500, pre-tax, catch up contribution. (Note: Retirement plan contributions must be made by December 31, 2013)

• Maximize your HSA contribution for future medical expenses - contribute $3,250 for self only coverage or $6,450 for family coverage. An additional catch up contribution of $1,000 for individuals over age 55 is allowed.

• Other Planning Ideas:
• Consider deferring income until 2014 or accelerate receiving income in 2013.  Also consider shifting deductions or losses into 2013 or 2014.  Depending on your situation for current and future years, this may be a useful tax planning strategy.
• Increase your itemized deductions by making charitable contributions and/or paying state and local taxes before year end.
• Take advantage of available credits including child and dependent care credit, child tax credit, higher education credits, and the residential energy credit.
• Strategically plan investment sales.  If you have significant gains, consider selling some investments at a loss to offset the capital gain.  Also, consider holding investments for more than one year to qualify for long-term capital gain rates.

For Corporations and Partnerships, here are a few ideas to reduce taxable income or pass-through income:

• First Year “Bonus” Depreciation Deduction – write off 50% of the entire cost of new assets with a useful life of 20 years or less.  The assets must be placed in service and ready for use by December 31, 2013 to be eligible.  (If choosing not to take advantage of bonus depreciation, you must elect to opt-out of bonus depreciation on your Federal Return.)  Be careful: many states, including New York, do not allow for the additional bonus depreciation deduction. The additional deduction must be added back on these state tax returns. 

• Section 179 expensing – expense up to $500,000 of the entire cost of new or used qualified property placed in service and ready for use before December 31, 2013.  If you purchased more than $2 million in assets, then the expensing benefit begins to phase out.

• Bonuses and Profit Sharing - If you are a C Corporation, consider paying bonuses before December 31, 2013 or electing to make a profit sharing contribution.  These 2 deductions will help to reduce taxable income and to avoid paying additional tax at the corporate level.  Note: The accrued profit sharing contribution must be paid by March 15, 2014 or September 15, 2014 if the tax return has been extended, for calendar year filers.

• Make charitable contributions -  These help the corporation, the shareholders and most importantly the qualified charitable organization.

• Small employer health care credit - The credit is still available for 2013.  If you pay at least 50% of your employees’ health insurance premiums, have less than 25 full-time employees earning, on average, less than $50.000 for 2013, you may be eligible for a 35% credit based on total premiums paid.

• Net Operating Losses (NOL) – carry back your 2013 loss to 2011 and 2012 in order to obtain a refund from income taxes previously paid.  The NOL can also be carried forward to reduce future taxable income.

• Other tax credits available for 2013 include the investment credit, work opportunity credit, research credit, and energy credits.

Tax planning is no easy task.  There are often several different scenarios you have to consider and juggle in order to have a good idea of your taxable income and tax liability.  If tax planning is done properly there should be no surprises come April 15^th.

As always, please contact your Dermody, Burke & Brown advisor if you have any questions with year-end tax planning.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.