Navigating the 2013 Tax Environment
At the time of this writing, Congress and the President are hand-in-hand escorting our economy off of the proverbial fiscal cliff. While government spending, tax rates, deductions and phase-outs may be vastly different by press time, there are some tried-and-true ways to save on your tax bill that are in vogue regardless of the tax environment. We also have some new wrinkles to address regardingMedicare surtaxes.
Most tax opportunities (the peaks) are gained by acting prior to the fiscal year-end. If you haven’t filed your tax return, it may not be too late to impact your 2012 tax. Consider these options for the last or current tax year:
Accelerating Depreciation on Eligible Real Property
A cost segregation study may drastically shorten the life that real estate components will depreciate for tax purposes. Even better, you can catch up all of the prior years’ benefits in the current year.
Research & Development Credit
Expected to be retroactively reinstated, this credit essentially provides you with a dollar-for-dollar tax benefit on 6 percent of your R&D costs.
Set Up or Improve Self-Employed/Corporate Retirement Plan
This is one of the best methods of long-term income tax deferral. Cross-tested and other plans may help superfund contributions to benefit the older high-income ownership group. Don’t just settle for a SEP-IRA or even a straight-forward 401(k), as there may be many more advantageous options.
Put Your Kids to Work in Your Business
You will get high tax rate deductions while your kids will owe very little tax, if any, at their super-low tax rates.
Expansion Phase or Large Equipment Purchases
You may be eligible for tax incentives offered by the State ofFloridato reduce or eliminate sales tax on your equipment additions. If you are a manufacturer, you may also be eligible for partial or total exemption of sales tax on your electricity bill. What’s more, these exemptions are even refundable for three open statute periods.
Multiple Businesses: Where Some Make Money and Some Lose
Are basis problems keeping you from deducting your business losses? Consider a holding company structure where the basis tests must be met at the parent company level. You are able to offset your business income with your losses. This is also a great tool for liability protection.
The impacts of the 2010 Patient Protection and Affordable Care Act (aka Obamacare) have been phasing in over the last few years. In January, theMedicare surtaxes became effective (the valleys), helping to fund health care reform, and will impact high income earners:
- On wages and self-employment income (earned income) in excess of $200,000 (or $250,000 with spouse), an additional 0.9 percentMedicare surtax will apply.
- There is a 3.8 percentMedicare Surtax on Net Investment Income (unearned income), applicable to interest, dividends, royalties, annuities, rents, passive activities and most capital gains. This applies to individuals or married families with modified adjusted gross income of: $200,000 Single; $250,000MFJ; and $125,000MFS.
- It is time to determine your strategies to reduce or eliminate these surtaxes and their effect on your cash flow. Consider moving income producing investments to growth-oriented (think Apple stock) or exempt assets (e.g. municipal bonds). Work with your tax advisor to determine if there are tax grouping options so that your passive investments may be reclassified to an endeavor in which you are active, and thus, not subject to the surtax.
Other Key Tax Figures for 2013
- The gift tax annual exclusion will rise from $13,000 to $14,000. This is the amount you can give each year tax-free to as many people as you would like, and it does not affect your estate tax lifetime exemption.
- The limit on elective deferrals to 401(k) and other plans will rise to $17,500 (plus an additional $5,500 if you are age 50 or over).
- The standard mileage rate for business driving has increased to $0.565 per mile.
Don’t Try To Go It Alone
With major legislative changes coming into place, and more expected as the year progresses, working with your CPA, attorney and investment advisor is more important than ever. Crucial focus should be paid in helping to minimize your tax burden, direct your investment efforts toward their highest tax-effected value, and plan for potential gifting and estate planning as rules are newly defined by legislators.
Heather McDonough is a tax partner at Berman, Hopkins, Wright & LaHam CPAs and Associates, LLP, an Investor of the Economic Development Commission of Florida’sSpaceCoast.