There are a number of tax provisions expiring in 2013. Some of them impact individuals and others businesses. Here are a few notable ones that may impact you:
- “Section 179” expense is widely known. It allows businesses to expense the acquisition of business property, such as equipment. There are some limitations, however, on its use. The last few years have been generous. Businesses are permitted in 2013 to write-off up to $500,000 of business property purchased during the year. However, to the extent such purchases exceed $2,000,000, there is a dollar-for-dollar reduction in the amount of Section 179 expense that is permitted. This changes in 2014! Starting in 2014, the maximum Section 179 expense is reduced to $25,000. To the extent property purchased during the year exceeds $200,000, there is a dollar-for-dollar reduction in the permitted amount of Section 179 expense.
- Recommendation: If you’re planning a big capital expansion in the near future, try to bundle it in 2013.
- Bonus deprecation in the amount of 50% of the cost of qualified property may be expensed in 2013. In 2014, it is no more.
- Recommendation: As with Section 179 expense, consider pushing capital expansion to 2013, if you can.
- ALSO: There are advantages to the 50% bonus depreciation deduction versus taking Section 179 expense. Please call me to discuss.
- Charitable contributions up to a total of $100,000, made directly from your IRA are permitted in 2013 if you’re over 70 ½ years of age. These distributions, called “qualified charitable distributions”, are not counted towards your income, nor can they be deducted as an itemized deduction on Schedule A. They are applied to your Required Minimum Distributions (RMD) for the year. There are numerous benefits. For instance, such distributions do not increase adjusted gross income, which is a trigger that, at certain levels, reduce tax benefits and increase tax. In addition, for those who don’t itemize, charitable contributions provide no benefit. While a direct contribution to a charity from your IRA provides no tax benefit, nor does it increase income. This tax provision EXPIRES at the end of 2013.
- For 2013, but NOT for subsequent years, Qualified Conservation Contributions are permitted up to 50% of Adjusted Gross Income. Amounts in excess may be carried-forward 15 years. For years AFTER 2013, the maximum contribution is limited up to 30% of Adjusted Gross Income and amounts in excess may be carried-forward for only 3 years.
- 2013 is the last year when an S-corporation shareholder may reduce his or her basis in the S-corporation by the pro-rata adjusted basis of the asset contributed by the S-corporation to a charity. Starting again in 2014, the S-corporation shareholder will have to reduce his or her basis by the pro-rata share of the fair market value of the asset contributed. The 2013 tax law is a good deal because while the taxpayer gets to deduct the value of the asset (which is presumably greater than its basis), the unrealized gain embedded in the contribution doesn’t impact his or her stock basis, which will come into play when the stock is eventually sold. While the tax benefit from the contribution is the same in 2013 and 2014, the basis in the shareholder’s S-corporation stock is higher if the charitable contribution is made in 2013 than if made in 2014.
WHY ESTIMATING YOUR 2013 INCOME TAX IN OCTOBER IS A GOOD IDEA
I’d say most taxpayers in the U.S. have fairly predictable federal and state income tax liabilities. While there’s always change, those whose tax returns are dominated by W-2 income manage to stay ahead of the game by withholding through their employers.
The folks who have problems are those whose income is primarily self-employment related or, for the lucky few, attributable to investment income.
I’m keenly aware that people find tax penalties abhorrent. It’s like absentmindedly missing a credit card payment only to be dinged for interest unnecessarily. I know it drives me crazy, too. However, as of today, interest rates on underpaid estimated tax (arising from the failure to pay the proper amount of estimated taxes on time) are historically low. This estimated tax penalty, which is calculated as if the government has loaned YOU the tax you pay to them, is in essence interest expense on the underpayment. The amount depends on the amount of the underpayment and how long it’s been outstanding. While it can seem like a lot of money (any amount is too much!) it pales in comparison to what I’ve observed way too many times: and that is, an unanticipated income tax liability that becomes known to the taxpayer only days before it’s due. That, friends, is a heart-sinker.
Forewarned is forearmed. Spend a little time in October estimating your tax responsibility due on April 15th of the next year and, while the outcome may not be pleasant, at least you’ve given yourself the opportunity to deal with it.