The first half of 2014 has produced little in the way of major tax legislation, but tax planning opportunities still exist. I sat down with Chris Townes, C.P.A., senior partner at Parker & Townes, P.C. to discuss some of these tax planning opportunities. Following are seven keys to mid-year planning for 2014.
- Retirement Plan Contributions – Now is a good time to think about potential retirement contributions – as an employer and also individually. Most 401(k) plans provide for an elective “profit-sharing” employer contribution, based on the census of all employees. Evaluate options at mid-year, so that cash flows can support higher contributions late in 2014 or early in 2015. Elective deferral contributions for 401(k) plans can be maximized for the year with payroll withholdings spread over many months. SEP and SIMPLE Plan contributions that require employer matching contributions should also consider cash flows to fund ahead of year-end. Maximum employee contributions vary by plan and for ages under and over 50 years.
- Dependent Care Credit – Latch onto dependent care credit. If you pay a sitter or day care center to watch your young children this summer while you and your spouse work, you may be eligible for a dependent care credit. The maximum credit is generally $600 for one child; $1,200 for two or more children. Note that the cost of sending a child to day camp qualifies for the credit, but not overnight camp.
- Charitable Contributions – Wrap up that spring cleaning project and donate old household items and clothing in good condition to a qualified charitable organization. For most noncash items you can claim a charitable deduction based on their fair market value. Also, consider funding charitable contributions with appreciated stock to offset capital gains.
- Offset Capital Gains – If you realized capital gains earlier this year, you can sell securities now at a loss to offset those gains, plus up to $3,000 of ordinary income. Otherwise, the maximum federal income tax rate on short-term gains is 39.6% or 20% on long-term gains, and you may also owe the 3.8% NIIT (net investment income tax) and state income taxes. NIIT only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain – and applies to “unearned income” which means investment income such as interest, dividends, capital gains, rent and royalty income.
- Plan for Medical Expenses – Beginning last year, the threshold for deducting medical expenses went up from 7.5% of AGI to 10% of AGI (unless you’re age 65 or older). You can deduct only expenses that exceed that floor. One way to save taxes even if your expenses don’t exceed the floor is to contribute to a tax-advantaged health care account, such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). Contributions are pretax or tax-deductible, and withdrawals used to pay qualified medical expenses are tax-free. Many rules and limits apply, however. If an HSA or FSA isn’t an option or won’t cover all of your medical expenses, take a closer look at the medical expense deduction. Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (23.5 cents per mile driven). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.
- Claim the simplified home office deduction. The recession has prompted many workers to start their own businesses, many of which are run from their homes. There’s good filing news for these entrepreneurs. The IRS is now offering a simplified home office deduction. The new optional deduction is $5 for each square foot of home office space, up to a maximum of 300 square feet. That comes to a maximum $1,500 annual home office deduction. The IRS estimates that this option will save home-office filers who claim it’s an estimated 1.6 million hours of paperwork and record keepings collectively. While the new deduction option will be welcomed by many, note that the requirements to qualify as a home office still apply. For instance, the office space must be used regularly and exclusively for business.
- New Asset Capitalization Rules – Effective in 2014, new regulations require businesses to establish policy for the capitalization of major outlays on property and equipment. Gone are the days of “writing off” major repairs; now new standards will be enforced by IRS. Plan ahead on expected costs of facility, property, and equipment purchases, upgrades, improvements, and repairs, to determine the tax treatment in advance.
These “keys” are important to consider now, which will allow ample time to act later in the year. Please seek the advice of your tax advisor before implementing tax strategies or transactions.