As 2013 draws to an end, we at Perkins find ourselves with a few tax planning tricks up our sleeves that we’d like to share. Congress may make look you in the eye and resolutely promise tax reform, but we suspect that the most we’ll get this year is a broken wand and a puff of smoke. So, let’s focus on what we know and see what magic a little tax planning might do for you. Perhaps we can pull a cash bunny out of your tax hat!
2013’s higher tax rates increases the benefit of income tax planning
We hate to remind you about bad news… but the facts remain: your tax rate probably went up in 2013. Even worse, it went up for more than one reason: healthcare reform added a “net investment income” surtax and an increase in the Medicare payroll tax rate for high earners; and 2012’s year-end tax bill allowed the Bush tax cuts to expire, establishing a higher top tax rate for ordinary income and capital gains/dividends. Furthermore, a three-year respite from phase-outs and limitations on exemptions and itemized deductions ended, decreasing the value of deductions for higher-income taxpayers. If your gross income is more than $200,000, you may be affected by the surtax; and if your taxable income is more than $400,000, you may also be affected by the rate increases.
What can you do? Actually, you may be able to do something, through shifting assets away from current income investments; by spreading income into lower-rate years; and by being strategic about your business and personal tax deductions. For more on these and other ideas, check out our blog posts on Minimizing Net Investment Income and Managing the Impact of Tax Rate Increases, then pick up the phone and give us a call. Or just call us – we’re happy to talk you through the impact of these increases on you, and the ideas we believe may be effective in your situation.
Fixed asset expensing and “bonus depreciation” greatly curtailed for 2014 – so buy it and get it in service before 2013 ends!
Let’s review: In recent years, businesses have been able to immediately deduct somewhere between 30% and 100% of their fixed asset acquisitions for tax purposes as “bonus depreciation,” provided the acquisitions were new personal property, or qualified leasehold improvement property. Bonus depreciation was continually re-instated through multiple pieces of legislation as a “short term” stimulus measure again and again – in all but two years since 2001. 2013 is one of these good years – businesses can immediately deduct 50% of such purchases, provided the property is in service by 12/31/2013.
Another jarring return to “normal” will be the reduction in the section 179 fixed asset expensing limit from its 2011, 2012 and 2013 exceptionally high level of $500,000 to a meager $25,000, which phases out entirely if you acquire $200,000 in fixed asset additions. The phase-out level is $2,000,000 in 2013.
Will Congress renew either or both of these once again? They might… but it seems less likely this year than it has before. Accelerating capital improvements into 2013 could therefore generate immediate deductions that you might otherwise wait a long time to see.
We keep telling you to give it away
For those expecting taxable estates, we’ve been shouting every year since 2010 that this is it! This is the year you must gift assets to your heirs in order to take advantage of historically high lifetime exemptions and historically low gift tax rates. It’s still true! Now that the lifetime exemption is indexed to inflation (and as high as $5,250,000 for 2013), every year is a good year to gift more than the $14,000 per person annual exclusion amount, especially if you hadn’t already utilized the maximum exclusion available through 2012.
Why do it now? Three reasons:
1) The sooner you give it, the more it appreciates outside of your estate,
2) Oregon has no gift tax, but it does have an estate tax – if you give it away now, your estate will not have to pay this effective 9.6% Oregon estate tax – ever; and
3) Congress hasn’t yet eliminated numerous estate planning strategies such as valuation discounts, but may still include them in future tax reform, to help offset the cost of rate decreases elsewhere.
There are always many factors to consider and weigh so we encourage you, as we do each year, to get in touch with your Perkins & Co advisors to walk through the specifics of your situation.
This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern. Based on the most recent “best practice” standards for tax advisors issued by the Treasury Department, commonly referred to as Circular 230, we wish to advise you that this blog post has not been prepared to be used, and cannot be used, to provide assurance that penalties which may be assessed by the IRS or other taxing authority (including specifically section 6662 understatement penalties) will not be upheld.