As most of you are aware, the President signed the extensions for some pretty sought after tax benefits into law last month. For this year, business owners, real estate investors, and individuals will get to reap the benefits of the extension. The long list of tax deductions, credits, and other benefits or breaks were set to expire this year so this extension was a pleasant surprise for many of us.
The Major Ones:
- Tax deductions for mortgage insurance premiums
- Low income housing tax credit for new construction
- Tax Credits for energy efficient improvements for existing residential
- Tax credit for energy efficient new homes and tax deduction for energy efficient commercial buildings
- The work opportunity tax credit
- Tax deduction for qualified tuition and related expenses
In the coming days, I hope to be able to expand more on each of these changes as we head into the 2015 tax filing season. However, in the meantime, let’s focus on some compliance and planning-related items that we can do before the end of the year to reduce our taxes and to minimize our audit exposure.
Issuing and Filing 1099s
Staying in compliance with the law is important and the deadline for 1099s is fast approaching (2 days!). If you find yourself wondering if you need to issue 1099s to your vendors let me make it simple. The basic rule is that if you paid for services throughout the year that add up to more than $600 to an unincorporated independent contractor then you must issue a 1099. Hopefully at this point in time you have W-9 form from every contractor that you paid $600 or more to in 2014. When you hire a handy man or laborer to come and do odd jobs throughout the year it could be tempting to not issue them a 1099 even if it adds up to more than $600. BUT if you get audited the IRS penalties for not issuing the 1099 can be quite steep and in my opinion are not worth the risk.
Retirement Account Funding
Most of the time you have until April 15th to fund retirement accounts for the previous year. There are however, some types of retirement accounts, such as 401Ks or defined benefit plans, that have to be set up by December 31st of the tax year in question to be deducted. It’s imperative to plan ahead and have those types of accounts set up by the deadline. That December 31st deadline also holds true for converting a Traditional IRA to a Roth IRA.With a Roth conversion You have until October 15th of the following year to decide if you want to change it back into a Traditional IRA. This can have some pretty great tax advantages! If your investment grows substantially you may want to see those gains tax free and keep it as a Roth on the other hand if the investment has meager gains or loses money you may wish to convert it back to a Traditional IRA with no taxes or penalties.
Pre-Paying Taxes and Expenses
I’ve never liked the idea of giving the IRS my money any sooner than I have to but in some instances it makes some sense. For example, if your rental property business is generating a lot of positive cash flow, then you may want to consider pre-paying re-occurring bills that you know you will have such as homeowners insurance, garbage, landscaping, etc to bring your income level down. Conversely, if your rental business is going to be negative and you can write off all of your losses, expenses and show no income then you may want to do the opposite. Another way to reduce taxable income is to purchase items that will be used for your real estate company. Replacing worn out appliances or other improvements for your rental properties could be a wise investment.
Selling a house, multi-family unit, or commercial building should have had a lot of thought put into it. Weighing the pros and cons to determine when would be the best tax year to sell is just plain smart. If you’ll be selling at a gain you would want to sell in a year when your taxable income is high and if you’re selling at a gain doing so in a year when you have lots of tax breaks and therefore less taxable income would be wise. Each situation is unique, so be sure to plan ahead with your tax adviser. In my experience tax planning has been somewhat frustrating because it really is hard to find tax advantages. Good luck and I hope 2015 is a great year for you with many tax credits and tax breaks.