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6 Tax Tips to Minimize Your Tax Burden

It’s 2015 and that means it’s that time again to file your income taxes. We have prepared six year-end tax tips that provide strategies to lower your personal and business income taxes.

Individuals

1. Defer income and accelerate deductions.

Carefully timing income and deductions is a fundamental strategy to reduce your tax liability. Postponing end-of-year bonuses, commissions and self-employment income till the next tax year will delay the taxes on that income. Similarly, making early payments towards real estate taxes, state and local income taxes and interest payments is another way to reduce your adjusted gross income (AGI).

2. Consolidate itemized deductions.

Some itemized deductions can be taken only if they exceed a percentage of your AGI. Medical and dental expenses must be over 10% of your AGI (7.5% if you’re 65 or older) and miscellaneous deductions must exceed 2%. Consider grouping these expenses so that they are deducted in a single tax year to ensure you meet the AGI thresholds.

3. Contribute to your retirement account.
Making contributions to your 401(k) or other workplace retirement savings plan is another great way to lower your taxes. Most plans allow you to make pre-tax contributions and defer paying taxes on that income until you withdraw the money (the exception being Roth accounts where contributions are made with after-tax dollars). The 2014 contribution limit is $17,500 for a 401(k) and $5,500 for an IRA (excluding catch-up contributions for individuals that are age 50 or over at the end of 2014).

Businesses

On December 19, the Tax Increase Prevention Act (TIPA) was signed into law. The act retroactively extends over 50 tax breaks through December 31, 2014. The following tax extenders focus on items that may provide the most significant opportunities for businesses for the 2014 tax year.

1. 50% Bonus depreciation

TIPA retroactively extended the 50% bonus depreciation allowance for 2014. This allows business to quickly recover the costs of certain qualified property. In general, property that qualifies for 50% bonus depreciation must meet the following requirements:

  • The depreciable property must be a certain type [i.e., qualified property—tangible property under MACRS with a recovery period of 20 years or less (including off-the-shelf software) and qualified leasehold improvement property];
  • The original use of the depreciable property must commence with the taxpayer after the relevant bonus depreciation date (i.e., bonus depreciation is available only for new equipment);
  • The depreciable property must be acquired by the taxpayer after December 31, 2007 and before January 1, 2015; and
  • The depreciable property must be placed in service before January 1, 2015 (aircraft and long-production-period property qualify if placed in service before January 1, 2016).

The election to increase the Alternative Minimum Tax limitation in lieu of bonus depreciation was also extended.

2. Research credit

TIPA has extended the research credit (also known as the R&D credit) to apply to amounts paid or incurred after December 31, 2013 and before January 1, 2015. This popular credit allows qualifying startup businesses to claim unused research tax credits against payroll taxes after applying the credit to income tax liability. Although complicated, we have achieved great substantial tax savings for our clients.

3. Section 179 deduction

For the 2014 tax year, businesses can immediately expense up to $500,000 of qualified new and used assets. This allows businesses to more quickly recover costs than through normal depreciation deductions. The section 179 deduction is phased out dollar-for-dollar if the total cost of all qualifying property placed in service in 2014 exceeds $2 million.

For more information regarding tax minimization strategies, contact us at info@www.pdr-cpa.com.

This article was written by: Brian Berry, Staff Accountant at PDR CPAs

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