Posted on December 20th, 2013

At this point in 2013, there is still time to minimize your taxes.

Consider converting your unincorporated partnership or Schedule C to a Sub S company to minimize payroll taxes. Yes you do have to pay some salary and incur some payroll taxes to avoid the IRS re-characterizing all net income as subject to payroll taxes and the Medicare tax.

Consider a Simple IRA for your workplace where the employer matches up to 3% of each employee’s salary, but only to the extent an employee saves. Most employees don’t save. Doing this allows the owner to put away $12,000 per year and if he/she is age 50 another $2,500 as a deduction from his taxable wage plus the employer’s match of 3% of his salary. These are very cost effective plans for small employers and can easily and cheaply be set up via any mutual fund family, insurance company, or bank.

The standard IRS reimbursement rate for vehicles is now $0.565 per mile for business, and $0.24 for medical and moving reimbursement miles versus $0.15 per mile for charitable purposes.

You can set up a HSA, or Health Savings Plan, where you deduct funds from your salary and it reduces your taxable income. These balances even if unused can be carried over year to year. Distributions from these plans are tax free even though they and their contributions are reported on your income tax form. Please check with your human resource individuals in this matter.

There is now a new simplified Home office which can more easily be deducted now by expensing out $5 per square foot capped at 300 square feet or $1,500 per year. You can use this method without providing receipts and you can still deduct all of your regular home mortgage expense and real estate taxes. I highly recommend this.

Gifts of $14,000 per year can now be given free of gift tax and $28,000 if the givers are a married couple.

There are several basic forms of business: 1) a corporation, 2) a limited liability company, 3) a partnership and 4) an unincorporated business or Schedule C filed in your personal return. Both the corporation and the Limited Liability Company or LLC have in most cases limited liability from creditors and are the preferred method of doing business unless you are in certain restricted professions. The basic difference between the corporation and the LLC is little except the LLC is easier to set up and form.

Once that is done though, you are advised to elect a Subchapter S election to convert your LLC or corporation to an “S” company to minimize payroll taxes. If you have a partnership, be sure to have each partner be an LLC which elects a Sub S and have it be the partner in the partnership. This will save you big money over time.

If you have a business, maximize the purchases of equipment this year to take advantage of the $500,000 expensing of all assets. This provision lapses next year to only $25,000.

There are special provisions for depreciating restaurant property, but they lapse after this year. So if you need equipment, please buy before year end.

Challenging Things of the Net Investment Tax

There is an ugly new thing effective for 2013. There will be a new additional tax on “net investment income” which is defined as net rental profit, net capital gains, dividends, interest, payments from annuities and royalties or in effect “passive unearned income”. If you have been a saver, this will apply to you if your income is over $200k for an individual or $250k for a married couple.

How do we handle this extra tax?

First, we minimize other types of income like capital gains which raise the income over the $200k/250 minimum, so that the surtax does not apply. Second, where we have recognized capital gains, offset these with selling securities with losses to minimize the $200k/250. Third, where you have a business, consider faster depreciation on currently purchased assets to reduce income. Fourth, consider investments in mutual funds where the expenses of the fund reduce the net dividends which are applicable to this tax.

Know that the net profits from your unincorporated business, your partnerships, and your Sub S companies are not subject to this additional tax. And so are interest from muni bonds, Roth IRA withdrawals, social security and pension income not subject to this additional tax. Since “net investment income” by law is only net rental profit, net capital gains, dividends, interest and royalty income, it seems logical that IRA distributions also are exempt from this additional tax.

 Another effective change is a higher tax bracket

 For those people who have more than $400k in taxable income for Singles or $450k if married, your highest tax rate will now rise to 39.6% from 35% and this does not include the above mentioned Medicare surtax.

Least Taxed Items

The least taxed items excluding the new Medicare surtax are qualified dividends and long term capital gains.