Year-end tax planning for 2014 must consider many important “temporary” tax provisions that have expired and may not be retroactively reinstated and extended before the end of the year. With the election now passed, Congress may or may not act to extend or reinstate various beneficial tax provisions.
The key expired provisions are covered below, along with year-end planning moves to cope with the current uncertainty, where appropriate.
In 2014, some individuals will benefit from inflation adjustments to the thresholds for applying income tax rates, higher standard deduction amounts, and higher personal exemption amounts.
Long-term capital gains continue to be taxed at a rate of:
- 20% if the taxpayer is in the 39.6% income tax bracket
- 15% if the taxpayer is in the 15% income tax bracket but below the 39.6% income tax bracket, and
- 0% if the taxpayer is below the 15% income tax bracket.
Low-Taxed Dividend Income
Qualified dividend income continues to be taxed at the same favorable tax rates that apply to long-term capital gains. Where possible, converting investment income (which is taxable at higher regular rates) into qualified dividend income can achieve tax savings and result in higher after-tax income. However, the 3.8% surtax on net investment income may apply.
Expensing Deduction (Section 179)
Unless Congress changes the rules, for tax years beginning in 2014 the maximum amount that may be expensed is $25,000, phased out dollar for dollar once total fixed assets purchased exceeds $200,000.
For 2013 the maximum amount that could be expensed was $500,000 and the phase-out didn’t begin until total assets purchased exceeded $2 million. However, despite what Congress does (or doesn't do) to adjust the limits for 2014, some businesses may be able to purchase necessary machinery and equipment at year-end and currently deduct the cost under a “de minimis” safe harbor election in the capitalization regulations. Click here
to read our e-focus on tangible property regulations which provides further guidance on this topic.
First-Year Depreciation Deduction
Property bought and placed in service in 2014 (other than certain specialized property) no longer qualifies for the 50% bonus first year depreciation deduction.
Deduction for Qualified Production Activities Income
Taxpayers can continue to claim a deduction, subject to limits, for 9% of the lesser of:
- Taxpayer's “qualified production activities income” for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or
- Taxpayer's taxable income for that tax year before taking this deduction into account
This deduction generally has the effect of reducing the taxpayer's marginal rate and therefore should be taken into account when making decisions regarding income shifting strategies.
Research and Development (R&D) Tax Credit
Unless Congress acts, businesses are no longer eligible for the R&D tax credit starting in 2014. However, given the credit’s popularity among lawmakers, it is very likely to be temporarily extended for 2014, although the timing of such extension is uncertain. Stay tuned and be prepared to act fast.
Alternative Minimum Tax (AMT)
Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not always save taxes because it may subject the taxpayer to the AMT.
Charitable Contributions from Required IRA Distributions
Note that for 2013 (but not for 2014) individual taxpayers who were at least 70-1/2 years old could contribute to charities directly from their IRAs. These contributions satisfied the 2013 required minimum distribution (RMD) without having to include these amounts in gross income. For some taxpayers, due to the interplay of marginal tax rates and limits on itemized deductions, this planning strategy resulted in less tax than would have occurred by including the RMD in gross income and deducting the contribution as an itemized deduction.
It is not known whether this tax break will be extended for 2014. However, taxpayers may want to consider deferring until year-end their required minimum distributions (RMDs) for 2014 in order to take advantage of this tax break should Congress act to extend it.
Net Operating Losses and Quick Refund Claims
Businesses with losses this year may be able to file a quick net operating loss carryback claim to receive a cash refund. This may be of particular value to financially troubled businesses that could benefit from a fast cash infusion.
We will continue to keep you informed of the latest developments throughout the remainder of the year. For more information regarding any of the topics in this e-focus, please contact your RubinBrown advisor.