Exploring Cash Balance Plans: A Unique Retirement Solution for Certain Business Owners

Retirement planning is a crucial consideration for business owners seeking to secure their financial future. Among the various retirement plan options available, the cash balance plan has gained reputation as an innovative and advantageous solution. Tailored to meet the needs of business owners and key employees, cash balance plans offer unique benefits that make them a unique option for those seeking tax-efficient retirement strategies.

Understanding Cash Balance Plans

A cash balance plan is a type of defined benefit retirement plan that combines features of both defined benefit and defined contribution plans. In a cash balance plan, participants are promised a specific benefit at retirement, usually in the form of an account balance, which grows annually through employer contributions and an annual interest credit. These plans are known for their predictability, as they offer participants a clear understanding of the retirement benefit they can expect to receive.

Key Advantages:

  • High Contribution Limits – Cash balance plans allow for substantial annual contributions, which can be especially beneficial for high-income business owners aiming to maximize their retirement savings while enjoying significant tax deductions.
  • Age-Weighted Contributions – Cash balance plans enable employers to contribute more on behalf of older employees, allowing business owners to accelerate their retirement savings as they approach retirement age.
  • Tax Efficiency – Cash balance plans offer potential tax advantages by reducing taxable income through substantial contributions. Investment earnings within the plan grow tax-deferred until withdrawal.
  • Creditor Protection – In many cases, cash balance plans offer protection from creditors, safeguarding retirement savings in the event of unforeseen financial challenges.

Ideal Taxpayer for Cash Balance Plans

Cash balance plans are particularly well-suited for certain types of taxpayers who seek retirement planning solutions tailored to their financial goals and circumstances:

  • High-Income Business Owners – Entrepreneurs and business owners with substantial income can benefit from cash balance plans, as these plans allow for larger contributions compared to traditional retirement options.
  • Professionals Nearing Retirement – Individuals in their 40s and 50s who have achieved a high income and have a shorter time period until retirement can take advantage of accelerated contributions to build a significant retirement nest egg.
  • Businesses with Uneven Income – Cash balance plans offer flexibility in contributing more during profitable years and less during leaner years, making them an excellent fit for businesses with fluctuating income.
  • Owners with Key Employees – Cash balance plans can be used strategically to provide enhanced retirement benefits for key employees, fostering loyalty and attracting top talent.
  • Sole Proprietors and Partnerships – Self-employed individuals, sole proprietors, and partners can utilize cash balance plans to substantially reduce their tax liability while securing their retirement future.

Cash balance plans stand out as an innovative tax saving solution. With high contribution limits, tax efficiency, and a range of advantages, these plans offer a strategic way for business owners and high-income individuals to secure their financial well-being in retirement. Contact KT to speak with one of our experts about securing the future you deserve, today.

October 9, 2023

Research & Development Expenses Tax Update

Beginning in 2022, research & development (R&D) expenses receive new tax treatment.

Historically, the government has provided multiple tax incentives to companies performing research and development activities under the premise that this is good for economic growth. The government has generally allowed companies to both immediately expense R&D costs and receive tax credits related to these activities. Due to the law changes within the 2017 Tax Cuts and Jobs Act (TCJA), the treatment of research activities will change in 2022.

Starting in 2022 businesses can no longer deduct R&D expenses all in one year. The new rules require costs to be capitalized over a five or fifteen year period for expenses associated with research conducted outside of the U.S..

What does this mean? Taxpayers who have traditionally claimed R&D expenses can expect more taxable income starting in 2022. Higher taxable income means higher tax payments.

Let’s look at an example:

Company A has R&D product development resulting in $100,000 of R&D expenses. Prior to 2022, Company A would recognize and deduct 100% of the costs in the year incurred. Now in 2022, the $100,000 of expenses must be amortized over 5 years, resulting in only a $20,000 per year deduction. This example defers $80,000 of expenses until future years and inherently creates higher taxable income in 2022.

The good news is that the research activities tax credit is still available. In the scenario above, Company A may also qualify for the increasing research tax credit totaling a percentage of R&D expenses. In this example, $100,000 of qualified R&D expenditures would result in approximately $6,000 of tax credits to Company A. TCJA did not change the timing or nature of the R&D tax credit. Unfortunately, the extra 2022 tax relating to the deferral of the deduction will be much greater than the 2022 tax credit.

Industries such as construction, engineering, manufacturing, agricultural production, or breweries may be doing some form of qualified research and development.

The five-year deferral of research expenses is not optional.  These mandatory capitalization rules and the R&D tax credits are complex to analyze, calculate and document. If you have questions about whether your business qualifies for the R&D tax credit or has capitalization requirements, please reach out to your KT advisor.

September 27, 2022

President Signs $1.9 Trillion Bill: American Rescue Plan Act of 2021

The American Rescue Plan, 2021 (ARPA, 2021) was passed by Congress on March 10, 2021 to address the continuing economic impact on employers and employees the coronavirus (COVID-19) pandemic has posed. President Biden signed the bill today, March 11. The legislation extends and expands provisions found in the Families First Coronavirus Relief Act (FFCRA), Coronavirus Aid, Relief and Economic Security (CARES) Act, and the Consolidated Appropriations Act, 2021 (CAA, 2021).

2021 Individual Recovery Rebate/Credit
Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus $1,400 for each dependent of the taxpayer.

  • For purposes of the credit, an “eligible individual” is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year.

Phaseout of credit. The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over: 

  • $150,000 for a joint return;
  • $112,500 for a head of household; and 
  • $75,000 for all other taxpayers.

The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:

  • $160,000 for a joint return;
  • $120,000 for a head of household; and
  • $80,000 for all other taxpayers

NOTE: Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. This includes many individuals who only file a tax return to claim the refundable earned income credit and child tax credit. NOTE: This credit is technically for 2021 and taxpayer who did not qualify for advance of credit based on 2020 income, may still receive credit on 2021 tax return if 2021 income is under phase out limitations.  

Child Tax Credit Expanded for 2021
For tax year 2021 the CTC is temporarily expanded as to eligibility, and amount, as follows:

  • The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021. 
  • The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year).
  • The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. That is, refundability will be determined without regard to either the earned income, or alternative formula.

NOTE: These amendments apply to tax years beginning after December 31, 2020.

Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers
In the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include unemployment compensation received by the taxpayer as long as it does not exceed $10,200.
NOTE: Law does not provide for a phase-out based on AGI. Therefore, if a taxpayer makes $150,000 or more, the exclusion does not apply, and all the individual’s unemployment compensation would be included in gross income

  • Some taxpayers already filed their returns before the passage of ARPA. If these taxpayers included unemployment compensation in their gross income, they should file amended returns if they qualify for the exclusion.

Taxpayers Don’t Have to Repay Excess Advance Premium Tax Credit Payments for 2020
Beginning in 2020, under the ARPA you no longer have to payback your ACA (Obamacare) premium subsidies if you made too much money. If you have insurance through the ACA exchange you may have received premium subsidies based on estimates from your prior year return.  Prior to this law, with unexpected income, you would have received a potentially large tax bill with your 2020 return.

Paid Sick and Family Leave Credits
Changes under ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. ARPA, 2021:

  • Extends the FFCRA paid sick time and paid family leave credits from March 31, 2021 through September 30, 2021. 
  • Increases the amount of wages for which an employer may claim the paid family leave credit in a year from $10,000 to $12,000 per employee.
  • Expands the paid family leave credit to allow employers to claim the credit for leave provided for the reasons included under the previous employer mandate for paid sick time. For the self-employed, the number of days for which self-employed individuals can claim the paid family leave credit is increased from 50 to 60 days. 
  • Permits the paid sick and family leave credit to be claimed by employers who provide paid time off for employees to obtain the COVID-19 vaccination or recover from an illness related to the immunization.  
  • Increases the paid sick and family leave credit by the cost of the employer’s qualified health plan expenses and by the employer’s collectively bargains contributions to a defined benefit pension plan.
  • Establishes a non-discrimination requirement where no credit will be permitted to any employer who discriminates in favor of highly-compensated employees as defined under Code Sec. 414(q), full-time employees, or employees on the basis of employment tenure. 
  • Resets the 10-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee. The current 10-day limitation runs from the start of the credits in 2020 through March 31, 2021. For the self-employed, the 10-day reset applies to sick days after January 1, 2021 for self-employed individuals. 

Employee Retention Credit
The new legislation:

  • Extends the ERC from June 30, 2021 until December 31, 2021. The legislation would continue the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the CAA extension and the pending ARPA extension, this means an employer would potentially have up to $40,000 in qualified wages per employee through 2021. 
  • Limits the ERC to $50,000 per calendar quarter of an eligible employer that is a “recovery startup business” as defined in Code Sec. 3134(c)(5). A “recovery startup business” is one that: (1) began operations after February 15, 2020 whose average annual gross receipts for a 3-taxable-year period ending with the taxable year which precedes such quarter does not exceed $1,000,000, and (2) experiences a full or partial suspension of operations due to a governmental order or experiences a significant gross receipts decline.
  • Continues the year-over-year gross receipts decline requirement at 20%; and the threshold for qualified wages (even if the employee is working) would continue to be 500 employees, as expanded by the CAA. Also, certain governmental employers would continue to be exempt from claiming the ERC, except certain tax exempt organizations that would include colleges and universities or medical or hospital care providers.
  • Requires the Treasury Secretary to issue guidance providing that payroll costs paid during the covered period would not fail to be treated as qualified wages to the extent that a covered loan under the Small Business Act is not forgiven. As with the expansion of the ERC under the CAA, this would continue to mean that Paycheck Protection Program (PPP) recipients would be eligible if the loan did not pay the wages in question.
  • Qualified wages paid by an employer taken account as payroll costs under (1) Second Draw PPP loans; (2) shuttered venues assistance and (3) restaurant revitalization grants are not eligible for the ERC.

Unemployment Provisions
The new legislation:

  • Extends continued unemployment provisions to September 6, 2021. This would include the: (1) pandemic unemployment assistance (PUA), (2) federal pandemic unemployment compensation (FPUC), (3) pandemic emergency unemployment compensation (PEUC), (4) the funding for waiving the one-week unemployment benefit waiting period, (5) the temporary financing of short-time compensation (STC) payments for states with programs, (6) STC agreements for states without programs, (7) temporary assistance for states with federal unemployment advances, and (8) the full federal funding of extended unemployment compensation.

NOTE: Further temporary suspension on the accrual of interest on federal unemployment loans to states and a waiver of interest payments under the ARPA assists certain employers that otherwise would have to pay an unemployment tax assessment.

  • Extends the FPUC unemployment payment of $300 per week through September 6, 2021.
  • Does not extend the 50% credit for reimbursing employers.

Paycheck Protection Program Modifications
The new legislation:

  • Allocates an additional $7.25 billion towards PPP funding, however, the application period has not been extended and remains March 31, 2021.

Other Relief-Related Provisions

Restaurant revitalization grants. ARPA appropriates $28,600,000,000 for fiscal year 2021 to struggling restaurants to be administered by the SBA. The money will be available until expended. Eligible entities include restaurants, or other specified food businesses, and includes businesses operating in an airport terminal. It does not include a state or local government operated business, or a company that as of March 13, 2020 operates in more than 20 locations, whether or not the locations do businesses under the same name. It also does not include any business that has a pending application for, or has received, and grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits and Venues Act. The amount given to any business who fulfills the eligibility and certification requirements is $10,000,000 and limited to $5,000,000 per physical location of the business. Grants may be used for: (1) payroll costs; (2) mortgage payments; (3) rent; (4) utilities; (5) maintenance expenses; (6) supplies; (7) food and beverage expenses; (8) covered supplier costs; (9) operational expenses; (10) paid sick leave; and (11) any other expense determined to be essential to maintaining the business. 

Shuttered venue operators. CAA, 2021 authorized grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues. ARPA appropriates $1,250,000,000, for fiscal year 2021, to help carry out these grants. The money will be available until expended. Governmental entities do not qualify.

Aviation manufacturing job protectionARPA establishes a payroll support program for the continuation of employee wages, salaries and benefits for aviation manufacturing employers who have furloughed at least 10% of its workforce in 2020 compared to 2019, or experienced a 15% decline in revenues from 2019 to 2020 (although separate qualifications are set forth for companies that had no involuntary furloughs. 

March 12, 2021

Cares Act: Laws That Affect Individuals

Updated April 27, 2020

We hope you are keeping yourself, your loved ones, and your community safe from COVID-19. Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. Here is a list of tax-related provisions focused upon assisting individual taxpayers. 

Recovery Rebates: A provision of the new law provides eligible individuals with a recovery rebate. This is tax-free money that does not need to be paid back.

  • Individuals will qualify for a $1,200 rebate, while joint filers will receive $2,400, with a $500 credit for each child.
  • Threshold amounts will be based on 2018 adjusted gross income (unless a 2019 return has already been filed).
  • Phase-out will begin at adjusted gross income of $75,000 for single filers, $112,500 for heads of households and $150,000 for joint filers.
  • Rebates will be phased out by $5 for every $100 in excess of a threshold amount. Therefore, rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500 and joint filers with $198,000.
  • Individuals must meet certain requirements to be eligible for the recovery rebate, including:
    • Not being a nonresident alien.
    • Must not be able to be claimed as a dependent on another taxpayer’s return.
    • Cannot be an estate or trust.
    • Must have included a Social Security number for both the taxpayer, the taxpayer’s spouse and eligible children (or an adoption taxpayer identification number, where appropriate). 
  • If rebate is limited due to income threshold or missing dependents on most recently filed tax return, taxpayer will be able to claim balance of missed credit when filing 2020 tax return if 2020 tax return meets thresholds above. Taxpayer will not be required to repay excess on 2020 tax return if rebate check was greater than entitled amount. 
  • With the exception of social security recipients, IRS urges anyone who qualifies for the credit and who has not yet filed a tax return for 2018 or 2019 to file as soon as possible so they can receive an economic impact payment. To speed receipt of payment, taxpayers are advised to include direct deposit banking information on the return.
  • IRS will post all key information on https://www.irs.gov/coronavirus
  • Planning Point – Review income thresholds, you can qualify for credit using 2019 AGI or 2018 AGI (if 2019 not yet filed).

Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus. Penalty-free distributions are limited to $100,000, and may be subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to include the distribution in 2020 income. Withdrawn amounts can also be recontributed to qualified retirement plans without being subject to any tax if re-contributed within three years.

  • Planning Point – You have the entire 2020 tax year to pull money from qualified retirement plans. However it may not be ideal to pull out at current market levels if you believe a rebound will take place.
  • Planning Point – You can effectively have a 3 year interest free loan if the withdrawn monies are paid back by end of 3rd year.  This could cash flow your business in the interim until other funding sources are provided.
  • Planning Point – If you believe the recent downturn in the stock market is temporary, this would be an ideal time for a Roth conversion.  

Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

  • Planning Point – You are not required to pull money out of the market if you consider current conditions unfavorable. You can defer entire 2020 required minimum distributions (RMD). In fact, if done by July 15th, you can re-contribute any RMD taken early in 2020.

Charitable Contributions: Individuals will be allowed to claim an above-the-line deduction up to $300 for cash charitable contributions for the 2020 tax year of 2020 contributions (i.e. not carryforwards). Furthermore, individuals will be able to claim unlimited itemized deductions for 2020 charitable contributions, which are normally limited to 50% of adjusted gross income. 

Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, high deductible health plans are allowed to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan. The Act also allowed nonprescription medical products to be paid out of HSAs and Flex Spending Arrangements.

Unemployment Insurance: The pandemic unemployment assistance program provides an increase in unemployment insurance benefits to each recipient in the amount of $600 per week for up to four months. It also extends these benefits to self-employed workers, independent contractors and those with limited work history. In addition, the federal government will extend these benefits for an additional 13 weeks through Dec. 31, 2020 after state-funded benefits end.

NOL Carryback: The CARES Act has amended provisions to allow net operating losses incurred in 2018, 2019, and 2020 to be fully deductible, without the 80% limitation. The net operating losses from 2018, 2019, and 2020 are also allowed to be carried back five years.

April 2, 2020

The Land of Opportunity Zones

Opportunity Zones are a new tax incentive coming from the Tax Cuts and Jobs Act (TCJA).  These zones were created with the intent to connect private investment capital to economically distressed communities.  Designated opportunity zones have been assigned in South Dakota, with an opportunity zone residing right in downtown Rapid City (see map). These Qualified Opportunity Zones for all 50 states can be found on an interactive map at the www.cdfifund.gov website.

Opportunity Zones are a mechanism through which investors with capital gain tax liabilities can invest in Qualified Opportunity Funds (QO Fund) to receive preferential tax treatment. These funds can be used to make real estate investments and to purchase equity in businesses.  Investors have the possibility to defer all gains from the sale of any property, possibly reduce the amount of gain recognized and in many instances permanently exclude the appreciable gain in a QO Fund from taxation.

The investor must invest in a fund within 180 days after the sale or exchange of the capital asset. The fund entity can be a partnership, a corporation or a limited liability company.  Eligible gains include sale of stocks, real estate, business interests, etc.  Like property does not need to be exchanged to qualify for the deferral, for example, an investor can sell stock for a gain, invest in a QO Fund and purchase real estate.

QO Funds are separate entities established by the investor group to transfer gain and purchase a new investment.  The current law allows for self-certification of an entity as a QO Fund.   There is no maximum cap on the amount which can be invested.

Let’s look at an example. On January 2, 2018, ABC Corp. sells property to an unrelated party and has a resulting gain of $1 million, which ABC Corp then reinvests in InvestFund, a qualified opportunity fund, on March 30, 2018. ABC defers the gain until December 31, 2026, at which time ABC must recognize the deferral gain due to TCJA requirements even though the investment in the fund has not been sold. ABC Corp sells its investment in InvestFund on April 2, 2030, for $3.5 million. Since ABC has held the investment for 10 or more years, it may elect to treat the basis as $3.5 million and no gain is recognized.

Those expecting to pay large capital gains, real estate developers and business buyers should all take note.  Call us today with questions.


October 2, 2018

Small Business Pension Plans – A Retirement/Tax Savings Tool Easily Forgotten

Pension plans, also known as defined benefit plans, have been around for a long time and quite honestly don’t make sense for many businesses. For a small business with excellent cash flow, pension plans may be a perfect fit to shelter away big time tax savings. It can be easily overlooked when discussing retirement options such as SEPs, 401Ks, Simple IRAs, etc.; however, pension plans offer more opportunity than any other retirement vehicle for business owners and entrepreneurs to keep a larger share of their wealth out of the government’s pocket.

Any small business owner generating more than $250,000 a year in income should at least review if a pension plan makes the most sense, even if they already have an existing 401K or retirement account. An ideal candidate for pensions would be

  • A family run business with 1-5 employees
  • A single owner who serves as the sole employee for the business
  • Employers with significantly all part time/seasonal workers

Like 401K plans and IRAs, pension plan contributions are tax deferred for small business owners, but unlike 401Ks and IRAs, pension plans have a greater level of flexibility and higher contribution limits. By utilizing a pension plan, it’s possible for small business owners to stow away up to $215,000 in a single year as compared to only $18,000-$24,000 with a 401K. It’s not unusual to see 2-3 employee sized businesses contribute $300,000 to $400,000 towards their pension in a single year.

Some calculations are required and performed annually by a plan actuary to calculate funding options for defined benefit plans. These calculation costs can result in higher overall fees compared to other retirement vehicles however most clients that have a pension plan find the pension cost becomes a small burden compared to the reward of asset protection, greater flexibility, and maximized tax savings. Also, for those who need a high level of liquidity as working capital to keep their businesses running, pension plans may not always be the best retirement vehicle.

If you start a pension plan, you can take a credit of up to $500 a year for each of the first three years of the plan. The credit is for 50% of certain startup costs you incur in each of those years. Those costs include the expenses you incur in establishing and administering the plan, as well as the cost of any retirement planning education programs you sponsor for your employees.

If you had a pension plan in the last couple of years, you would not qualify for the credit unless waiting three years from the time the plan was terminated before starting a new plan. As an example, if you had a plan that was terminated in 2013, you would have to wait until 2017 to start a new plan and qualify for the credit.

If a pension plan does not seem appropriate for your business, there are several types of plans you can establish for your employees and still qualify for the credit. For example, you could start a SEP (simplified employee pension), profit sharing, or an annuity plan, among other choices.

Small business owners considering a pension plan as a viable option should seek out a qualified advisor that works with pension plans and can share in detail further pros and cons of a pension plan. As always, we are more than willing to have such conversations with you to see if a pension plan would be a good fit.

January 3, 2018

Year-End Tax Planning with Checklists

JesswebYear-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). These breaks include,

For individuals:

  • The option to deduct state and local sales on their itemized deductions
  • Certain deductions for qualified higher education expenses
  • Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older

For businesses:

  • Tax breaks that expired at the end of last year and may be retroactively reinstated and extended including 50% bonus first year depreciation for most new machinery

equipment and software

  • $500,000 annual expensing limitation
  • Research tax credit
  • 15-year write-off for qualified leasehold improvement property.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.
  • It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Businesses should consider buying machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby securing a half-year worth of depreciation deductions for the first ownership year.
  • Although the business property expensing option is greatly reduced in 2014 (unless legislation enhances this option for 2014), consider making expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
  • To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.
  • To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.

December 12, 2014