With minutes counting down to this year's tax deadline, clients (and many of their advisors) are scrambling to get paperwork wrapped up on time. But many advisors caution that in the heat of the moment, even professionals can forget the basics -- nevermind easy-to-miss, specialized strategies.
You probably are familiar with some of these last-minute tax tips, but might just need a reminder in the heat of the moment. Others may be entirely new to you and your clients.
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1. FEAR NOT THE EXTENSION
"Everyone is afraid of an extension," says Kyle Brownlee, CEO of Enid, Okla.-based Wymer Brownlee, part of the HD Vest network of tax-focused planning firms. "Everyone is just afraid of the IRS. They think: I am sending in my return late."
But an extension doesn't raise a red flag with the IRS, nor does it really mean clients are "late," he says -- although estimated taxes are still due April 15, even if the full return is not.
"I would much, much rather file an extension and get my ducks in a row and file later," he says, adding that an extension can be for a month or up to six months. "An extension is just no big deal and nothing to be afraid of."
2. LET ENTREPRENEURS WAIT ON FUNDING SEP PLANS
Small business owners and sole proprietors can wait until Oct. 15 to fully fund their simplified employee pension (or SEP) retirement plans -- which allow them to contribute up to 25% of the income on which they pay Social Security tax.
Many people pay their taxes on April 15 and fail to fund their SEP retirement plans because they don't have the money to pay taxes and fund their plan all at the same time, says Heather Locus, with Balasa Dinverno Foltz in Itasca, Ill.
For that very reason, the IRS allows clients to wait until Oct. 15 to fund their SEP plans if they file for an extension. "That is something people don't necessarily realize that one can actually do," Locus says.
3. ACCELERATE DEDUCTIONS FOR 2014
Many deductions may expire in the 2015 tax year, including deductions for manufacturing and other business equipment -- a category that includes vehicles of 6,000 pounds in weight, allowing many Land Rovers, GMC Yukons and Toyota Highlanders, Brownlee says.
These deductions, from section 179 in the tax code, remain in place for the 2014 tax year -- but no one knows if they will be extended or significantly reduced for 2015, Brownlee says. He recommends that high-net-worth business owners in particular accelerate all the deductions they can under this code for the 2014 tax year, rather than take them in increments of one-fifth per year over the next five years and risk the expiration, he says.
"You can elect up to $500,000 to expense on that equipment in 2014," he says.
The deduction pertains specifically to portable equipment; in addition to jumbo SUVs, the category includes tractors, heavy vehicles, computers, servers, desks and office equipment. Even heavy manufacturing equipment that may be bolted down, but can be shifted elsewhere in an assembly or manufacturing plan reorganization would qualify, he says.
"Think about it like this," Brownlee says. "It's for any type of non-permanent equipment. If I can pick it up and move it or if I can drive it or ride it or if it's not fixed."
4. PUT ALIMONY IN AN IRA
Alimony is considered "earned income" -- which is taxable compensation and, as a result, qualifies for saving in an IRAs, Locus says. That could help some recipients who are retired or otherwise not working, Locus says.
"To make an IRA contribution, you have to have earned income, so even if you have a $5 million portfolio and you have $100,000 in dividends, that doesn't qualify," she explains. "But getting paid alimony qualifies."
"A lot of CPAs don't think about that," she adds. "A lot of people who've gotten divorced don't think about that."
5. MAKE UP FOR LOST TIME
Remember that even seemingly well-off clients may need last-minute retirement help, cautions Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Fla.
"There are those heart-wrenching meetings when you have someone where you think they are doing fine and they are not," he says, citing one example.
"There was a well-known M.D. in town who for whatever reason had her world kind of blow up, and she had to pay most of her money to a spouse in a divorce," Auslander recalls. "He thought he was going to be a novelist, yet never wrote a book. Now she's 58 years old and she has to scramble.
"She's paid for all the kids' education because she was the breadwinner," he adds. "Now she's panicking and worried about her own security. I've seen [similar] cases, male and female."
Doctors and lawyers -- especially trial lawyers, Auslander says -- can find themselves in this predicament as they near retirement. The answer is to get them to make catch-up contributions to their traditional or Roth retirement plans.
Some clients can also open up a SEP right before they file their tax return, he says.
"They can deposit 25% of their income -- up to $52,000 for 2014 -- and $53,000 for the 2015 tax year. It's an opportunity to make up lost ground," he says. "That's an old strategy, but ... it keeps coming back and is valuable."
6. TAKE STATE DEDUCTIONS ON LEASE INCOME
Clients who receive lease income from oil and gas producing companies -- who lease the right to drill for oil on their land -- are profiting now, Brownlee says. Although oil producers are sitting on their heels, waiting for the price of oil to rebound, they are still paying pricey three-year leases to property owners for the right to drill eventually.
Lease holders must file a state tax return wherever they derive this income from, Brownlee says -- as long as that state has an income tax -- but some states also offer a deduction on that income.
Brownlee cites an example. "A client had a $400,000 lease bonus check" from Oklahoma this year, he says, and that state's 22% deduction gave her an $88,000 deduction against Oklahoma income, saving her roughly $4,400 on her state tax return. Out-of-state CPAs and planners might miss that, he notes.
7. SWITCH DEDUCTIONS AMONG DIVORCED COUPLES
This tactic might require ex-spouses to work together amicably, but there's a worthwhile payoff, Locus says.
Because the IRS is phasing out certain deductions for high earners who bring in $254,000 or more annually, she explains, formerly married couples may want to switch some deductions from the high-earning parent to the lower-earning one to reduce the total amount paid to the feds.
"Usually the person [in a divorced couple] who has the higher income takes the kids as a deduction exemption," she says, to get the biggest bang for the buck. However, "in 2013, a phase-out for itemized deductions and personal exemptions for high earners began again -- and now people who have an adjusted gross income of $376,000 for a single person or $402,125 for a head of a household don't get any benefit from it. So, it may make sense that the person in the higher tax bracket lets the other spouse take the deduction and the [co-parents] either split the tax benefit or put that money in a 529 college account for a kid."
Failing to swap these deductions means that, she says, "the IRS is just getting more money."
8. REMIND CLIENTS TO MAX OUT 401(K)S
Occasionally, Auslander takes on new clients whose former advisors convinced them that they would do better by not investing as much in their 401(k)s. However, those advisors' aims in giving that advice was entirely self-serving: to keep more assets to manage for themselves, he says.
In reality, clients are always better off putting the maximum amounts into their company's retirement plans, he says.
"The math is so compelling that you'd have to be an absolute fool not to," Auslander says.
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