While tax consequences should never drive investment decisions, it’s critical that they be considered — especially this year: Higher-income taxpayers may face more taxes on their investment income in the form of the returning 39.6% top short-term capital gains rate and 20% top long-term capital gains rate and a new 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

• Use unrealized losses to absorb gains.
• Avoid wash sales.
• See if a loved one qualifies for the 0% rate.

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

Questions about year-end tax planning for your investments? Contact us today!

By projecting your business’s income and expenses for 2013 and 2014, you can determine how to time them to save — or at least defer — tax. If you’ll be in the same or lower tax bracket in 2014, consider:

Deferring income to 2014. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into 2013. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if it looks like you’ll be in a higher tax bracket in 2014, accelerating income and deferring deductible expenses may save you more tax.

Accurately projecting income and expenses can be challenging. For help, please contact us. We can also provide additional ideas for timing business income and expenses to your  tax advantage.

As year end approaches, you may be trying to accelerate deductible expenses into 2013 to reduce, or at least defer, tax. But you must beware of the alternative minimum tax (AMT) — a separate tax system that limits some deductions and doesn’t permit others, such as:

• State and local income tax deductions,
• Property tax deductions, and
• Miscellaneous itemized deductions subject to the 2% of adjusted gross income floor, such as investment expenses and unreimbursed employee business expenses.

Accelerating these expenses could trigger the AMT, because you must pay the AMT if your AMT liability exceeds your regular tax liability.
The American Taxpayer Relief Act of 2012 (ATRA) set higher AMT exemptions permanently, indexing them — as well as the AMT brackets — for inflation going forward. This will provide some AMT relief, but higher-income taxpayers could still be vulnerable.
We’d be happy to help you determine whether accelerating deductible expenses will reduce your 2013 tax bill — or could trigger the AMT.

Beware of the AMT when doing year-end tax planning

Recently, the IRS released the 2014 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.34 million (up from $5.25 million in 2013). But even with the rising exemptions, making annual exclusion gifts is still a good idea.

The 2013 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2014.)

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2013 exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your granddaughter this year, you can’t add $28,000 to your 2014 exclusions to make a $56,000 tax-free gift to her next year.

Please contact us for ideas on how to make the most of annual exclusion gifts.

If you’re age 70½ or older, you can make a direct contribution — up to $100,000 — from your IRA to a qualified charitable organization in 2013 without owing any income tax on the distribution. This “charitable IRA rollover” can be used to satisfy required minimum distributions.

The American Taxpayer Relief Act of 2012 (ATRA) revived this opportunity, but only for 2012 and 2013. So if you’d like to make a charitable IRA rollover, consider doing so this year in case the opportunity isn’t extended. If you already took advantage of the ATRA provision that allowed a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012, you can make another $100,000 rollover this year for 2013 tax purposes.

Have questions about charitable IRA rollovers or other giving strategies? Please contact us. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.

If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster, perhaps dramatically increasing your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots and landscaping.

The benefit of a cost segregation study may be limited in certain circumstances, such as if the business is subject to the alternative minimum tax or is located in a state that doesn’t follow federal depreciation rules.

For more information on cost segregation studies — or on other strategies to maximize your 2013 depreciation deductions — contact us today.

Maybe. The following types of executive compensation could be subject to the health care act’s 0.9% additional Medicare tax:

• Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold
• FMV of restricted stock when it’s awarded if you make a Section 83(b) election
• Bargain element of nonqualified stock options when exercised
• Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture

And the following types of gains will be included in net investment income and could trigger or increase exposure to the act’s new 3.8% Medicare contribution tax:

• Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election
• Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements

We’d be happy to help you determine the best strategy for your exec comp. With smart timing, you may be able to reduce or avoid exposure to the expanded Medicare tax.

Contributing the maximum you’re allowed to an employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, is likely a smart move:

• Contributions are typically pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the new 3.8% Medicare tax on net investment income.
• Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
• Your employer may match some or all of your contributions pretax.

For 2013, you can contribute up to $17,500 — plus an additional $5,500 if you’ll be age 50 or older by Dec. 31.

If you participate in a 401(k), 403(b) or 457 plan, it may allow you to designate some or all of your contributions as Roth contributions. While Roth contributions don’t reduce your current MAGI, qualified distributions will be tax-free. Roth contributions may be especially beneficial for higher-income earners, who are ineligible to contribute to a Roth IRA.

Since 2007, homeowners have been allowed to exclude from their taxable income up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion had been available only for debts forgiven through 2012, but Congress extended it. Now that expiration date — Dec. 31, 2013 — is rapidly approaching.

You can have COD income if a creditor forgives a debt, reduces the interest rate or gives you more time to pay or in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement.

If you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion in case it’s not extended again.

The regulations (IRS T.D. 9636) provide guidance on how to comply with Sections 162 and 263 of the Internal Revenue Code. These sections require amounts paid to acquire, produce or improve tangible property to be capitalized but allow amounts for incidental repairs and maintenance of property to be deducted — potentially saving you more tax in the current year.

The final regs explain how to distinguish between capital expenditures and deductible business expenses. They replace temporary regs issued in 2011, but they retain many of the temporary regs’ provisions. In addition, they modify several sections and create a number of new safe harbors.

The final regs generally will apply to tax years beginning on or after Jan. 1, 2014. They affect all businesses that own or lease tangible property, including buildings, machinery, vehicles, furniture and equipment.

If you have expenditures related to tangible property, the final regs apply to you. Compliance may require changes to your current capitalization procedures and the filing of Form 3115, “Application for Change in Accounting Method.” If you have questions regarding the final regulations and how to best proceed, we’d be happy to help.