The summer is typically a time for individual taxpayers and small-business owners to take a deep breath while catching up on some recreational pursuits or other pleasurable activities. But there is precious little time to relax in the tax world. With that in mind, here are 10 mid-year tax strategies that may prove to be beneficial.
Tax Ideas for Individuals
1. Capital gains and losses: For 2013 and thereafter, the American Taxpayer Relief Act of 2012 (ATRA) increases the 15% maximum tax rate for long-term capital gain to 20% for single filers with income above $400,000 and joint filers above $450,000. In addition, the top income tax rate for ordinary income is raised from 35% to 39.6% for these same tax filers. Keep in mind that short-term gains from assets held a year or less are taxed at ordinary income rates.
Now is a good time to assess your situation. Depending on the results, you might be inclined to harvest tax losses to offset gains or vice versa. Remember that capital losses for the year can offset capital gains, plus up to $3,000 of ordinary income. Any remaining loss is carried over to next year. Note: Investment decisions are further complicated by the new 3.8% Medicare surtax. Beginning in 2013, this tax applies to the lesser of your “net investment income” or modified adjusted gross income above $200,000 for single filers and $250,000 for joint filers.
2. Vacation homes: If you rent out your vacation home when you are not using it, you can generally deduct your rental expenses against your rental income. However, if your personal use of the home exceeds the greater of 14 days or 10% of the time the home is rented, you cannot deduct a loss for the year. Make sure you stay within the tax law boundaries during the summer to avoid problems. Note: If you spend the day at the home making repairs, it does not count as a “personal use” day, even if the rest of the family uses the home for other activities.
3. Charitable deductions of property: Generally, you can deduct the fair market value of property you donate to a qualified charitable organization if you have owned the property for more than a year. For example, if you decide to clean out the basement, attic or garage, you might give used clothing and furniture to charity and then claim a deduction. However, the property must be in good condition to qualify. Many organizations provide guidelines for establishing the fair market value of used property.
4. Energy credits: The residential energy credit, which had technically expired after 2011, has been reinstated and extended through 2013 by ATRA. Consider energy-saving installations this summer. The list of expenses available for the credit includes
- insulation materials
- exterior windows and skylights
- exterior doors
- central air conditioners
- natural gas, propane and oil water heaters or furnaces
- hot water boilers
- electric heat pump water heaters
- certain metal roofs
- biomass stoves
- advanced main air-circulating fans
For 2013, the credit is equal to 10% of qualified expenses, up to a lifetime maximum of $500. Note: Other limits may apply.
5. Estimated taxes: To avoid penalties for tax underpayments, you must pay enough tax during the year through any combination of withholding and quarterly “estimated tax” payments. The tax law provides two popular safe harbor methods: You will not be assessed a penalty if you pay at least 90% of your current tax liability or 100% of the previous year’s tax liability (110% if your adjusted gross income was more than $150,000). Depending on your situation, you might increase withholding now to qualify under a safe harbor method.
Tax Ideas for Small Businesses
6. Business trips: When you travel away from home on business, you may deduct your travel expenses—including airfare, lodging and 50% of the cost of meals—if the primary purpose of the trip is business related. But the number of days spent on business vs pleasure is crucial, so be careful as to how you allocate your time. Note: If your spouse accompanies you on the trip, his or her expenses are generally not deductible, but you can still deduct what it would have cost you to travel alone if that is more than half the cost.
7. Business property: Under Section 179 of the tax code, you can elect to currently deduct the cost of qualified business property purchased and placed in service during the year. The maximum deduction allowed for 2012 was $500,000 (subject to a phaseout for acquisitions above $2 million). Under ATRA, these limits are extended through 2013. Absent new legislation by Congress, the maximum allowance will plummet to $25,000 in 2014. Note: ATRA also preserves 50% bonus depreciation on any remaining cost of qualified property your business places in service this year. The bonus depreciation tax break is generally scheduled to expire after 2013.
8. Worker credits: The Work Opportunity Tax Credit (WOTC) for hiring certain economically disadvantaged workers, which technically expired after 2011, was revived by ATRA retroactive to the 2012 tax year and extended through 2013. Normally, the WOTC is equal to 40% of the first $6,000 of wages, for a maximum $2,400 credit per qualified worker. However, if your firm hires qualified individuals age 16 or 17 for the summer, the credit is generally equal to 25% of the first $3,000 of wages, for a maximum credit of $750 per qualified worker. Note: The summer credit for youths applies only to services performed between May 1 and September 15.
9. Business entertainment: Although country club dues are not deductible, a small-business owner who entertains clients on the golf course or on the tennis court may still claim top-dollar write-offs. For instance, if you treat a client to a round of golf before or after a “substantial business discussion,” you can deduct 50% of the fees, club rentals, and your meals and drinks afterward. Note: If the client is from out of town, the business discussion can take place the day before or after the golf outing.
10. Company picnic: Usually, deductions for business entertainment and meals are limited to 50% of the cost (see above). However, if you hold a summer picnic or barbecue for the entire workplace, your business can write off 100% of the cost. Note: It will not jeopardize the deduction if you also invite a handful of business associates and social guests.
These are just 10 potential tax-saving opportunities available to taxpayers midway through the year. Obtain more information pertaining to your situation.