By Daniel A. Castellano, CPA
managing partner
Castellano, Korenberg & Co.
As the end of the 2013 tax year approaches, tax planning is more important than in recent times for families earning $450,000 or more, as tax rates have substantially increased during this year.
The top federal tax bracket has been increased from 35% to 39.6%, capital gains rates have increased from 15% to 20%, and a new 3.8% Medicare surtax on investment income has been enacted.
To the best extent possible, defer income into the next year and accelerate expenses into the current year.
Pre-pay items for 2013 for items earmarked for business expenditures in 2014. Review contract receivables and retainages for possible bad debt write-offs. Maintain correspondence related to all collection attempts to support these write-offs in case of audit.
Contractors whose annual gross revenues exceed $10 million and report on the percentage of completion method for tax purposes should be conservative in estimating profitability on contracts in process at the end of the year.
These contractors should also delay the approval of pending change orders until after the end of the year.
Maximize tax deductible contributions into a corporate qualified retirement plan for all non-union personnel.
Earnings will be compounded and tax deferred until withdrawn at retirement. The manufacturers’ deduction, also called the “domestic production activities deduction,” is available for contractors and is 9% of the lesser or qualified production activities income or taxable income.
The deduction is also limited to 50% of W-2 wages that are allowable to domestic production gross receipts.
Take full advantage of the generous write-offs for capital expenditures. The Section 179 expensing election allows businesses to deduct (rather than depreciate) the cost of purchasing such assets such as machinery, equipment, furniture, computers, etc. For the year 2013 the expensing limit is $500,000 on up to $2,000,000 of qualified acquisitions.
If asset purchases exceed the phase-out threshold, consider 50% bonus depreciation. It may provide greater tax savings because it has no asset purchase limit.
If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster and dramatically increase your current deductions.
If you own a business, consider hiring your children. As the business owner, you can deduct their pay. They can earn as much as the standard deduction for singles ($6,100 for 2013) and pay zero federal income tax. They can earn an additional $5,500 in 2013 without paying current tax if they contribute to a traditional IRA.
Section 529 savings plans offer parents and grandparents a tax smart way to fund higher education expenses.
Contributions to the plan aren’t federal tax deductible but plan assets grow tax exempt. Distributions used to pay for qualified higher education expenses — such as room and board, books, supplies, computers, etc. are income tax free for federal purposes.
Investments that are held for more than one year may help substantially cut tax on any gain, since federal capital gain rates are approximately one half of ordinary income tax.
Appreciating investments that don’t generate current income aren’t taxed until sold, deferring tax and perhaps allowing you to time the sale to your tax advantage – such as in a year when you have capital losses to absorb the capital gain.
The real estate market has its ups and downs, real estate can be a valuable investment – whether it’s your home or vacation home or a rental or investment property.
Property ownership also can offer significant tax savings, as long as you take advantage of all the breaks available to you.
When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples) of gain if you meet certain tests. Gain that qualifies for the exclusion will also be excluded from the new 3.8% Medicare contribution tax.
You can exclude gifts of up to $14,000 per recipient each year ($28,000 per couple) if your spouse elects to split the gift with you without using up any of your lifetime exemption. An annual gifting program can significantly transfer wealth out of your estate.
Under the Taxpayer Relief Act, for 2013 and future years, the top estate tax rate will be 40%. The estate tax exemption will continue to be an annually inflation adjusted $5,000,000, so for 2013 it’s $5.25 million.
The Taxpayer Relief Act also makes exemption “portability” between spouses. If part or all of one spouse’s estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.
Making this election is simple and provides flexibility if proper planning hasn’t been done before the first spouse’s death.
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