Find your inner Scrooge to save on taxes this year
By Bruce Brinkman
In the Charles Dickens tale “A Christmas Carol,” the Ghost of Christmas Future frightened Scrooge with visions of bleak days ahead. Perhaps it was the expiration of favorable tax breaks for businesses in the American Taxpayer Relief Act of 2012 that gave Scrooge a scare. But you still have time to act now and redirect a few of those taxable dollars into your own pocket with these tax-saving strategies.
Unless extended by Congress, dozens of tax incentives are scheduled to expire on Dec. 31. Bonus depreciation, which allows a business to take an additional deduction of 50 percent of the cost of qualifying property, is slated to go away this year. If you have been considering purchasing that new tractor or other farm implement, this could be the year to bite the bullet and capture the cash savings from a higher depreciation expense allowance.
Other significant tax incentives scheduled to expire on Dec. 31 include higher dollar limitations for expensing qualifying property (under Code Sec 179). The limit will plummet to $25,000 beginning in 2014 from the current level of $500,000. Purchases of qualified used equipment and other property don’t qualify for the bonus depreciation allowance, but could be expensed this year.
Charitable individuals 70 1/2 and older may still make tax-free contributions of up to $100,000 to their favorite charities from their individual retirement accounts this year. These transfers are not only tax-free but satisfy the annual minimum distribution requirements for 2013. This allowance also goes away this year.
Taxpayers in the higher income tax brackets will want to watch out for the Additional Medicare Tax increases that took effect this year. The threshold for married couples filing a joint return is $250,000 in wage and self-employment income. Income above that mark is subject to a surtax of .9 percent. Taxpayers who are approaching this level and who are partners or owners of an S corporation may reduce their exposure to this tax by taking cash distributions from their businesses rather than W-2 income (assuming compensation levels are reasonable).
Net investment income above certain levels will also be subject to a surtax of 3.8 percent beginning in 2013. The threshold is the same as the Medicare tax, but is imposed on capital gains, dividends, rents, royalties and other income such as revenue from passive investments. Rental income may be considered passive unless it results from the “ordinary course of the taxpayer’s trade or business” which is not well defined in the Internal Revenue Code. What is passive income for you may be considered active income for your neighbor, depending upon your involvement in the operation.
If you have invested in mutual funds during the past five years, don’t be surprised by large capital gains distributions this year. Funds that hold stocks and have seen large gains may be distributing some of those gains before year-end to their shareholders. Many bond funds, on the other hand, have seen their share price decrease. Investors with both types of funds—the winners and the losers—may be able to offset the capital gain distributions by selling shares of their bond funds with losses.
In most cases, the same traditional tax-savings strategies apply in 2013 as in previous years: defer income and accelerate expenses. However, the probable expiration of tax incentives and the introduction of two new taxes make tax planning more of a challenge. The best advice is to consult an experienced tax advisor and then join Scrooge in celebrating the season with family and friends.
Editor’s note: Bruce Brinkman is a Certified Financial Planner with Allen, Gibbs & Houlik, L.C. of Wichita. He can be reached at 316-291-4191 or firstname.lastname@example.org.