The opportunity to take advantage of income timing exists particularly for taxpayers who are:
- In a different tax bracket in 2014 than in 2015;
- Subject to Alternative Minimum Tax (AMT) in one year but not the other;
- Subject to the 3.8% net investment income (NII) tax in one year but not the other; or
- Subject to the 0.9% Medicare tax on earned income in one year but not the other.
Year-end tax planning is especially challenging this year because Congress just acted to extend tax breaks that expired at the end of 2013. The President is expected to sign the bill this week. Although the legislation makes tax breaks retroactive to January 1, 2014, there is precious little time remaining in the year for taxpayers to take action. The good news is that in many cases, the bill provides tax savings for actions individuals and businesses have already taken. For individuals these breaks include:
- The above-the-line-deduction for qualified higher education expenses.
- Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older.
- The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include:
- 50% bonus first year depreciation for most new machinery, equipment and software.
- The research tax credit.
- The 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to earned income in excess of $250,000 for married filing jointly and $200,000 for single filers.
Given all of the above, it is important to assess your particular situation and meet with a qualified tax professional.
The next posts in this series will highlight specific tax planning strategies.