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Defer Income to 2014? Yes, You Can!

  • 20 November 2013
  • Author: ellice909
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Defer Income to 2014? Yes, You Can!

Tax time can be stressful for a small business owner, especially if you experienced unexpected large business and/or personal gains or losses this year. Keeping income growth relatively steady from year to year is an ideal scenario to manage expected tax liabilities. A huge boost in income could become a huge tax burden when not managed wisely.

As a business owner, you may have the flexibility to either accelerate or defer income from year to year, in order to manage unexpected changes and avoid unnecessary capital gains and income tax expenses. Sometimes, changing tax laws will play a role in whether to accelerate or defer. In 2012, for instance, many business owners chose to accelerate income in order to avoid the approximately 20 percent increase in the maximum rate of ordinary income tax rates and almost 67 percent increase in capital gains rates in the new year. This year, tax laws will not be as volatile and we anticipate many business owners will choose to defer, especially if they foresee earning the same or less income in 2014.

Whether or not you choose to defer income this year depends, in part, on your answers to two questions:

  1. How was 2013 when it comes to business and personal gains and losses?
  2. Do you anticipate 2014 to be better or worse in reference to the statement above?

Your answers may not be simple ones, so we can help you weigh both options accordingly. Most often, it comes down to whether or not the gains or losses will change your current income tax bracket. In Texas, where there is no state income tax, we’re talking about federal income tax rates. These vary from year to year, so take those fluctuations into consideration.

Harvest capital losses to offset capital gains. 

 Recent market indices indicate that stocks and bonds may have substantial gains. Should you elect to sell and take those gains, remember to review your portfolio and harvest losses from other applicable investments. You can offset 100 percent of your gains with these losses. However, losses in excess of the gains can only be deducted up to $3,000 per year (for married couples filed jointly). If your net capital loss (losses exceeding gains) totals more than $3,000, the excess can be held over into 2014 and every year after until the full sum is utilized. If you have excess capital gains, consider charitable gifts of the securities (see below) rather than selling and paying cash for these donations.

Give capital gains to charity.

 Long-term (held over 1 year) stocks and bonds that have gains (in excess of losses discussed above) can be donated to your favorite charity -- to pay the “dues” and “commitments” made to your local church/synagogue, for example. Not only will you NOT pay tax on the gain, but you will also get a Charitable Deduction. Contact us to avoid potential traps in this area.

Wait for the last “paycheck.” 

Do you pay yourself a year-end bonus? Depending upon your tax bracket and your current earnings as well as expected Social Security and Medicare earnings, we usually suggest deferring it until after the New Year. Also, if you’re a sole proprietor and you invoice customers, hold any final invoices of the year until December 31. This ensures you will not be paid until January and, thus, will be able to wait until 2014 to claim this revenue.

Accelerate tax deductions. 

You may be able to do this one of two ways. First, mail a check for the deductible expense on December 31. Even if the check is received and cashed after the New Year, it counts toward the date it was mailed. Or, pay the deductible expense by charging a credit card by December 31. The item is considered paid on the date charged to the card, even if the funds are not collected immediately.

Donate your IRA Required Minimum Distribution. 

Some IRAs require annual distribution, which is taxed as income. However, you can satisfy the distribution requirements by making the payment directly to a qualified charity. You will satisfy the RMD requirements and the income will not be included on your tax return.

Of course, if you estimate that your income will increase in 2014, possibly pushing you into a higher tax bracket, some of these tactics could be reversed in order to accelerate income in 2013. Don’t automatically default to your “usual” way of doing business. There could be surprising advantages and disadvantages hiding around each corner, and they could change from year to year. Talk to us today about which tactic might suit your individual situation right now.

Main image credit: alphaspirit / 123RF Stock Photo

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