Whether Old Punxsutawney Phil’s Groundhog Day prediction came true or not, one thing is certain to arrive each year: Tax Day. April 15, 2015 is just a short 7 weeks away. There’s no hiding or going back into a hole to avoid or evade its certainty. We must face it head on.
Mailboxes across the nation have already begun to fill with W-2s, Form 1099s, broker statements, and more paper than we know what to do with. And with the forms comes the cumulative effects of stress, anxiety, and apprehension we feel about the ultimate tax bill headed our way on April 15. So we wait, worry, and procrastinate—only adding to our sense of uncertainty about that fateful date of the Tax Man’s arrival.
There must be a better way. The year is over. 2014 is complete. Is there anything I can do now to reduce my tax obligation? Should I even bother?
Commercial tax firm H&R Block wants to help you “get your billions back.” What they don’t tell you that it costs all of us roughly $30 million in lost income for each billion “given back” for the interest free loan made to the government. Rather than getting those billions back at the expense of your income, what if we thought about tax season as a way to keep your own money in your own pocket—not just on April 15, but for as long as you can? At Burke & Schindler, we work to help taxpayers pay their share of taxes responsibly, but not a penny more.
Here are five tax-saving strategies you can put to use responsibly even after the year’s end.
Adopt New Tangible Property Regulations
New tangible property regulations, which became effective on January 1, 2014, affect every taxpayer who uses tangible property in his or her business or rental operation. While these regulations have been a long time coming, the new rules can be highly complex and generally require the assistance of a professional.
What does this mean for me?
Proper adoption of the tangible property regulations may provide significant current-year tax deductions. For example, you may be eligible for expensing the remaining basis of roof repairs in 2014 if those repairs were capitalized in prior years and depreciated over 39 years. Adopting these rules is often highly favorable to taxpayers, and we have already seen significant tax benefits for clients who work to apply them. Additionally, because every business and individual with Schedule C (self-employed) or Schedule E (rental) must attach at least one new Form 3115, Application for Change in Accounting Method (and since most individual taxpayers have never seen Form 3115), your best next step this tax season would be to contact a tax professional at Burke & Schindler to better understand how you could benefit now.
Establish / Fund a SEP / IRA or Solo 401(k)
One of the best tax savings strategies for self-employed individuals is to establish a SEP IRA or a Solo 401(k). Contributions to these plans may serve to reduce taxable income and the resultant investments grow tax free until withdrawn. Additionally, establishing or funding a SEP IRA or Solo 401(k) is one of the few strategies for self-employed individuals you can implement after the year is over, but still receive a tax deduction for the prior year.
But, how do these plans work, and what are their individual advantages?
SEP IRA
A SEP IRA—Simplified Employee Pension Individual Retirement Plan—works in the same manner as a traditional IRA. The only significant difference between a traditional IRA and a SEP IRA is the contribution limit. For 2014, an individual may contribute the lesser of the following:
- 25% of net earnings from self-employment
- $52,000
Solo 401(k)
A Solo 401(k) on the other hand works much like a 401(k) plan with a person’s employer. The largest difference is, as a self-employed individual, you make a contribution as both an employee and employer in the following ways:
- Employee contribution—100% of your net earnings up to $17,500 for 2014 ($23,000 if age 50 or over)
- Employer contribution—25% of your net earnings from self-employment
Similar to the SEP IRA, the total contribution limit for 2014 is $52,000.
An Example Scenario
The following example shows the contribution differences between the SEP IRA and the Solo 401(k) plans for an example taxpayer. Our taxpayer here is 45 years old, works as a logistics consultant, has no employees, and earned $100,000 from self-employment in 2014.
| SEP IRA | SOLO 401(k) | |
| Employee contribution | $0 | $17,500 |
| Employer contribution (20% x $100,000) | $20,000 | $20,000 |
| TOTAL CONTRIBUTION | $20,000 | $37,500 |
These plans are best suited for self-employed taxpayers without employees. For those business owners who do have employees, alternatives to the SEP IRA and Solo 401(k) strategies do exist, and Burke & Schindler has worked to help uncover the smartest strategies for clients with employees.
Fully Fund Your Health Savings Account (HSA)
If you are covered by a high-deductible health plan, you can fund your HSA contributions any time up until the tax filing date, including extensions. These HSA contributions are 100% deductible from gross income. For 2014, your contributions are limited to $3,300 for an individual and $6,550 for a family. Additionally, if you’re over age 55, you may contribute an additional $1,000 catch-up. Your total HSA deduction for 2014 is added to Form 1040, Line 25, and Burke & Schindler tax professionals are available to assist you in developing an appropriate strategy for your 2014 tax year.
Amend Your W-4 for 2015
While the majority of your energy through April 15 will be spent finalizing your 2014 taxes, make sure you use this time as a learning opportunity for 2015. Remember, Americans lose $30 million in income throughout the year for every $1 billion given back in the form of tax refunds. If you receive a refund in 2014, amend your employee withholding allowance on your 2015 W-4 so that you can keep more money in your pocket throughout the course of the year. Not sure where to start or what to change? Burke & Schindler tax professionals can help you build a custom strategy that will help you both during tax season and on every paycheck.
Prepare a 2015 Tax Projection
Finally, the key to saving taxes over the long-term is to understand the potential cash needed to responsibly pay your taxes in the first place. At Burke & Schindler, we’ve seen how preparing a “practice” tax return for 2015 can result in long-term benefits for all taxpayers alike. On a quarterly basis, begin by gathering your latest pay stub and broker statements, and adopt an action plan for 2015. Consider how the strategies above might be salient in helping your adjust your approach for the forthcoming tax year. This knowledge will provide the taxpayer guidance in implementing year-end strategies.
By now, all taxpayers know there are ways to “get our billions back.” But, getting those billions back is only one part of the tax equation. Consult these five strategies to ensure you not only receive your appropriate refund this April 15, but also are empowered to charge forward confident in 2015. For additional advice on implementing these strategies and creating your game plan for this and next year, give our tax professionals a call today.