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What's new in year-end tax planning

Joe Kristan is a CPA at Roth & Company P.C.

There are a few new twists to year-end planning this year. Some important tax breaks are scheduled to expire at the end of the year, and some new provisions affect how old tax planning tools can be used.  

Two key tax breaks for buying equipment are slated for big changes at year-end: "Section 179" and "50% bonus depreciation." Section 179 allows many taxpayers to fully deduct the cost of assets that would otherwise only be recovered over a period of years. The maximumm Section 179 deduction is scheduled to decline from $500,000 for tax years beginning in 2013 to $25,000 for years beginning in 2014. 

Bonus depreciation allows a 50% writeoff of otherwise depreciable property in many cases where Section 179 is unavailable. With few exceptions, it is scheduled to go away for assets placed in service after 2013. 

While there is a chance these breaks will be extended retroactively, how many of us want to place money on Congress doing something? To get either deduction, the property has to be "placed in service" by year-end. "Placed in service" means "in a condition or state of readiness and availablilty for a specifically assigned function." That means in the posession of the taxpayer on the premises where it will be used, and ready to go. It does not mean on-order, paid for, in a crate on the loading dock, or on a Fed-Ex truck somewhere.

Two old tax planning tools are affected by the 3.8% "Net Investment Income Tax" under Obamacare. This tax applies to individuals with incomes over $200,000 (single filers) or $250,000 (joint filers). It also applies to many taxable trusts. The two tools are prepaying income taxes and harvesting capital losses.  

Personal state income taxes are deductible in the year paid. (Iowa allows a deduction for federal income taxes). Estimating the tax due in April has long been in the tax planning toolkit. It has been less useful in recent years because it doesn't help taxpayers owing alternative minimum tax. But even if you have alternative minimum tax, prepaying state income taxes can reduce the net investment income tax.

Capital losses. Individuals are allowed to deduct capital losses to the extent of capital gains, plus $3,000 ($1,500 for married filing separate returns). If you have capital gains, and you have some losers in your portfolio, now is the time to sell them off. Just make sure you avoid the "wash sale" rules by not replacing the loss shares in the 30 days preceding or selling the loss sale. Also be sure to not sell to a related party, as those losses won't be deductible. Newly-issued regulations make these losses available to offset net investment income, to the extent they are otherwise deductible.

Year-end tax planning is very taxpayer-specific. You can't look at an article or post and know how to proceed. Without a projection of your taxable income for this year, you can hardly even start year-end tax planning. Once you have an idea where you stand, you can take a shot at your year-end planning. 

In any case, get together with your tax advisor before you make any year-end moves. There are other tools that might fit your needs, and there's enough at stake to make sure you do it right.


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