Year-end planning will be more challenging this year due to increased tax rates and phase-outs tied to adjusted gross income (AGI). Unless Congress acts, a number of popular deductions, exclusions, and credits expired at the end of 2013 and won't be available for 2014. Some of the key deductions not available this year include generous bonus depreciation and expensing allowances for business property, exclusion of qualified home mortgage debt cancellation, research and development credits, and qualified charitable distributions that allow taxpayers over age 70½ to make tax-free transfers from their IRAs directly to charities.

Of course, Congress could revive some or all the favorable tax rules that have expired as they have done in the past. However, which actions Congress will take remains to be seen and may well depend on the outcome of the elections.

Before we get to specific suggestions, here are two important considerations to keep in mind:

1.   Remember that effective tax planning requires considering both this year and next year--at least. Without a multi-year outlook, you can't be sure maneuvers intended to save taxes on your 2014 return won't backfire and cost additional money in the future.

2.   Be on the alert for the Alternative Minimum Tax (AMT) in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem. There's a good chance you'll be hit with AMT if you deduct a significant amount of state income and real estate taxes, claim multiple dependents, exercised incentive stock options, or recognized a large capital gain this year. However, if you expect to owe income tax for 2014, you should consider prepaying state income tax to receive a benefit for federal income tax purposes as long as you are not subject to AMT.

Year-End Moves for Your Business

New Repair and Capitalization Regulations. All businesses will be required to adhere to new capitalization and repair regulations, with some required to file change of accounting method forms with the IRS. We will work with you to plan and implement these new requirements in a timely and cost-efficient manner.

Domestic Production Activities Deduction. If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.

Section 179 Expense. Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this), don't neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit has been reduced to $25,000 and the reduction in the dollar limitations starts to take effect when property placed in service in the tax year exceeds $200,000.

Check Your Partnership and S Corporation Stock Basis. If you own an interest in a partnership or S corporation, your ability to deduct any losses it passes through is limited to your basis. Although any unused loss can be carried forward indefinitely, the time value of money diminishes the usefulness of these suspended deductions. Thus, if you expect the partnership or S corporation to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end.

Managing Your Adjusted Gross Income (AGI)

Managing your AGI can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for joint returns, $200,000 for unmarried taxpayers. Additionally, the capital gain rate increases from 15% to 20% when your AGI exceeds $450,000 (MFJ) and $400,000 (Single).

New Health Insurance Reporting Requirements for Your 2014 Tax Returns

Health Insurance Mandate. Starting in 2014, individuals who don't carry "adequate" health insurance are subject to a penalty. Penalty is avoided with minimum essential coverage, which includes government-sponsored programs (Medicare, Medicaid, and the Children's Health Insurance Program), eligible employer-sponsored plans, plans obtained in the individual market, certain grandfathered group health plans, and other coverage as recognized by the U.S. Department of Health and Human Services. If the individual is uninsured for only part of the year, the penalty will be calculated on a monthly basis using prorated annual figures.

The penalty is to be reported on your federal income tax return, but enforcement is limited to subtracting the penalty from any federal income tax refunds.

Refundable Tax Credit for Buying Health Insurance. Starting in 2014 for low-income taxpayers, a new refundable tax credit called Premium Assistance Credit is potentially available to eligible taxpayers who obtain health insurance coverage in a qualifying health plan by enrolling through an Exchange. Eligible taxpayers are basically those with household income between 100% and 400% of the federal poverty level who don't have access to employer-provided coverage. You may want to alert any family members of this new refundable tax credit.