Tax Planning Twin Falls
How much more in taxes will you pay in 2014 ?
The elections are over and the tax-and-spenders won. So, we all know federal taxes are going up; the question is, “how much?” While the large issues that comprise the “fiscal cliff” threat remain undecided as I write this article, there are a number of tax changes that we already know will go into effect. How much you pay will depend on how well you do your tax planning.
Things are a bit different this year. The looming tax increases have many investors looking to book profits this year and pay the lower tax. We usually recommend that clients do the opposite – book losses to offset current income and defer income and the taxes to the next year. As the year ends, that thinking can be seen in the bear markets and in a number of private companies being sold.
According to Ruth Pierce, President of Stephens Pierce & Associates, CPAs, “With expert tax planning, Twin Falls residents could have avoided or deferred most of the new taxes. We alerted our clients as soon as the proposed changes were announced, and they are prepared for 2015 whichever way the politicians work their magic.”
Tax Planning for Investors in Twin Falls Real Estate
Before the new tax rules were even announced real estate investors were already taking a serious look at their portfolios in 2012 due to the plunging market prices. Now, the upcoming tax increases and the loss of various tax benefits in 2014-15, make the decision even more critical.
While the residential market for single family homes is certainly weak, it has driven a strong rental market for residential income properties. Multi-tenant properties and residences with a history of strong rental income are seeing nice appreciation in most markets. On the other hand, the rental market for commercial property is weak, particularly for manufacturing and retail.
For owners of residential rentals, it may be the right time to sell or otherwise accelerate income into 2014 rather than pay higher rates next year. There is a lot of money flowing into REITs right now searching for quality investments. For the commercial property owners or anyone else holding onto a lackluster property, this could be a time to sell if you have current income to offset or are able to carry the loss forward to offset future income that would otherwise be taxed at a higher rate.
Unfortunately, unlike stocks and other paper assets that can be liquidated at almost the last second, a real estate sale takes time to transact – assuming you’ve found a buyer. One option that can be made at the last minute is to gift the property. Gift and estate taxes increase and the maximum exemption decreases in 2014. If you would exceed those exemption limits next year, it may be better to gift the asset this year. With expert tax planning, Twin Falls property owners can make the right choice.
Tax Planning for Capital Expenditures
Companies have taken advantage of bonus depreciation that was provided as part of the government’s stimulus efforts. Rather than depreciate capital expenditures over a 7- or 10-year schedule, companies were allowed to depreciate 100% of the asset cost in 2011 and 50% of 2012 purchases. Accelerated depreciation acts as a stimulus by moving all of the tax benefits of investing in new equipment, facilities or other hard assets forward so that companies offset more current income and lower their current tax bill. The effect is to encourage companies to make capital expenditures – the type of expenditures that can drive employment.
However, with the bonus depreciation program ending and income tax rates rising, we may see the opposite effect. The incentive of accelerated depreciation disappears when you want to declare, not defer, current income. With no incentive to make capital improvements, that spending should decline. It’ll be interesting to see how much capital expenditures fall off and what effect it has on the overall economy.
Other Tax Increases in Twin Falls
The marginal tax rates applied to ordinary income rise to a high of 39.6 percent in 2013 barring a last-minute political deal to exempt certain classes of people. The tax on long-term investment income, or capital gains, also goes up, from 15% to 20%. If it’s any consolation, income tax rates in Idaho did not rise this year.
For investors and savers of all types, you will see a significant bite taken out of your yields – 3.8% – to pay for the Patient Protection and Affordable Care Act beginning in 2013. For a small percentage of homeowners, that tax can apply to the sale of your home as well.
Even with the best tax planning, Twin Falls residents won’t be able to avoid all the new taxes. However, for most income earners, the new tax changes represent a great time to meet with your financial advisors to review your tax strategy.