Although we’re off to a soggy start, summertime has arrived. Between children out of school, family vacations and making plans for fall, there is a lot to keep people busy. Summer also signals the halfway point of the year, and by now, most practices have a decent feel for how the year is going for them financially. With this information in mind, it is never too soon to start thinking about year-end planning.
Believe it or not, Congress actually did us a few favors last year. Many favorable individual and business tax incentives that were on the annual chopping block finally received the multiyear extension treatment they rightly deserved. What does this mean for you? In previous years, year-end planning, including the consideration for income taxes, has been a challenge due to cyclical rotation of expiring taxpayer-friendly laws. Typically, unless tax advisors could take a trip in a time-traveling DeLorean to take a look at the future, it has been difficult to determine what moves to make to avoid the “oh-no” tax bill. For the first time in many years, the Protecting Americans from Tax Hikes (PATH) Act of 2015 extended many of these laws for the foreseeable future and, in the process, added many tools to the tax savings tool belt. For individuals, the PATH Act permanently extended the sales tax deduction for taxpayers who itemize deductions. That is, should you make a large purchase (a car or boat, for example) the sales tax paid on the purchase is available as a deduction on your personal income tax return. The PATH Act also extends the American Opportunity credit (permanently) and the tuition and fees deduction (through 2016) for those with children in college. It also incentivized the choice to install energy-saving equipment into your personal residence with a residential energy tax credit (through 2016).
As for business incentives, the PATH Act permanently increased the amount of the Section 179 expense from $25,000 to $500,000! Section 179 allows, for federal income tax purposes, the election to immediately expense 100 percent of the acquisition cost of business assets (such as equipment, computers and office furniture) purchased and placed into service during the year. In addition to the expanded Section 179 expense, the PATH Act extended the “bonus” depreciation provision for 2016 and 2017 to allow the immediate 50 percent expensing of qualified assets in excess of what has been taken under Section 179. For 2018 and 2019, this allowable bonus depreciation expensing is reduced to 40 percent and 30 percent, respectively.
Other items to review during the summer include your level of federal income tax withholding and estimated tax payments. Will it be enough to avoid underpayment penalties assessed by the IRS? Are you paying too much? What about any life changes for this year? Marriages and the gift of children can significantly change your tax picture and possibly provide other planning opportunities. Now is also the time to take a look at your current compensation including maximizing contributions to a retirement plan (especially deductible plans such as a Traditional IRA), and don’t forget about your investment portfolio. If facing large capital gains tax exposure, you can plan ahead to gift appreciated investments to charity to avoid the capital gains tax and receive a charitable deduction in the process.
In summary, it’s never too soon to start thinking about year-end planning. In addition to the items discussed in this article, there are numerous opportunities to take advantage of for both individuals and businesses. Who knows, thinking through some of these items now just may make you rest a little easier on that trip to Disney World this summer.
Davis is a manager with Sol Schwartz & Associates PC and has been practicing public accounting since 2008. Davis practices in various areas of public accounting including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. He is a member of the firm’s healthcare niche that specializes in identifying and implementing solutions to achieve the goals of the physician clientele we serve. You can contact Davis at firstname.lastname@example.org or 210-384-8000, ext. 118.