It’s wise to consider the tax implications of business and financial decisions as the year winds down. This year, many tax benefits from the American Taxpayer Relief Act of 2012 (ATRA), which was extended through 2013, and many Bush-era tax cuts will end. The tax law changes from ATRA extensions ending and the implementation of the Affordable Care Act (ACA) introduce layers of complexity.
“It’s difficult for anyone to keep track of everything that is expiring, let alone what’s new. There are more moving parts than I’ve seen in a long time,” says Cathy Goldsticker, CPA, partner, Tax Services at Brown Smith Wallace.
“You need to plan and do some projections so you don’t discover in April that you have unexpected taxes due or you didn’t take advantage of a departing tax write-off.”
Smart Business spoke with Goldsticker about strategies businesses and individuals can follow to reduce tax liabilities.
What effect does the ATRA have on 2013 taxes?
Many of the provisions enacted under President George W. Bush are set to expire. Although the tax brackets from the Bush tax cuts will remain in place and are now permanent, individuals with taxable incomes of $400,000 or more — $450,000 for married couples filing jointly — are subject to a top marginal tax rate of 39.6 percent instead of the 35 percent marginal rate. These individual tax rates also will affect the taxes of the owners of pass-through entities.
A business relief provision that is scheduled to expire is for the built-in gain tax that is created when converting your C corporation to an S corporation, but is imposed after a subsequent sale of corporate appreciated assets. The temporary rule has been that if you hold your S corporation and related assets for five years, built-in gain tax goes away. Starting next year, the waiting period is 10 years. For owners looking to sell assets or a company, that may expedite the impetus to sell before the end of 2013.
Also being eliminated are faster write-offs for depreciation. Under Section 179, companies were able to deduct $500,000 for equipment in year one assuming less than $2 million in assets was acquired during the year. That will revert to the previous limit of $25,000. Bonus depreciation, which allowed you to write-off half of qualified property, is being removed for common acquired depreciable items.
You should think about accelerating your planned purchases, but also consider what your future income levels might be. You could be taking away deductions from future years when it’s possible to get a bigger bang for your buck with higher tax rates.
On the personal side, this is the last year business owners will have a choice between deducting sales taxes or state income taxes because the sales tax option will be going away. This could be a lost state benefit for those paying Alternative Minimum Tax.
This also will be the final year that taxpayers ages 70½ and older can transfer up to $100,000 from an IRA to a charity and bypass having the IRA distribution included as income. That can be important if you’re trying to stay below the $400,000 level and avoid the 39.6 percent tax bracket.
How will taxes change as a result of the ACA?
There is a new 3.8 percent tax on investment income and 0.9 percent Medicare tax that applies to self employment income for high income earners. Careful planning could avoid the claws of this extra tax.
To avoid these taxes and receive more benefit from your writeoffs, you might want to bunch deductions that are subject to phase-outs based on income. Instead of paying expenses such as advisory fees, and tax planning and preparation fees in 2013 and 2014, you might see if you can pay them in the same year.
Do the expiring cuts mean it’s best to move up as many deductions as possible?
You can’t look at your taxes in a vacuum; you still need to consider the impact of all options to determine the best route. Among the many moving parts, we could still see extensions of some provisions.
You should take the facts as they currently stand and put together pro forma projections for the next several years. Do some tax calculations for these years to figure out what you’ll encounter from a cash-flow standpoint, as well as what you could do to reduce some of the current increases. ●
Cathy Goldsticker, CPA, is a partner, Tax Services, at Brown Smith Wallace. Reach her at (314) 983-1274 or [email protected].
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