Tax Breaks Expiring at end of 2013:
- Option to deduct state and local sales and use tax instead of state and local income taxes
- Tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes
- Tax credit for energy-saving home improvements
- Purchase small business stock before January 1, 2014 to exclude 100% of gain on sale if stock is held for more than five years
- Businesses to take 50% bonus first year depreciation
- Tax credit for qualifying research expenses for businesses
- $500,000 cap on Section 179 depreciation expense with $2 million investment based phaseout for businesses
New for High Income Individuals:
- 3.8% surtax on unearned income is the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over the threshold ($250,000 – joint our surviving spouse; $125,000 married filing separately; $200,000- for all others)
- Additional .9% Medicare tax on wages in excess of $200,000 ($250,000 for married filing jointly; $125,000 for married filing separately)
General Checklist for Tax Planning:
- Review your plan contributions against your expense reimbursements to determine how much you need to use before the year end to avoid losing it. Contact your employer to determine if they will be amending the plan prior to the year end to change the plan document to allow the new carry forward amount of $500. Calculate your new plan contribution amount based on your plan specifics and your usage to enroll in the plan for 2014.
- Postpone income until 2014 and accelerate deductions into 2013 to lower your tax bill for possible advantages of claiming deductions and credits that are phased out over different levels of adjusted gross income. (Child tax credits, higher education tax credits and deductions for student loan interest) Postponing income is advantageous for those who are projected to be in a lower tax bracket next year due to a change in their financial situation. For those who project they will be in a lower tax rate this year, they should accelerate income in 2013.
- Take losses on stock if it is within your overall investment strategy. Consult your financial adviser to discuss your options.
- Take an eligible rollover distribution from a qualified retirement plan before year end 2013 if you anticipate a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Arrange the withholding taxes on the distribution to meet your tax liability shortage. You can timely roll over the gross amount of the distribution, increased by the amount of the withheld tax, to a traditional IRA. The distribution will not be taxable as income in 2013 and the taxes withheld will be applied to your 2013 tax liability with no underpayment penalty. Consult with your financial adviser for your options.
- Consider prepaying qualified higher education expenses, if doing so will increase your deduction for qualified higher education expenses. Generally, this deduction is allowed in connection with enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.
- If you own your home, make energy saving improvements, such as installing energy saving windows, extra insulation or an energy efficient heater or air conditioner to possibly qualify for a tax credit if installations occur prior to 2014.
- If you are self-employed, consider setting up a self-employed retirement plan if you haven’t done so yet.
- If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for 2013.
- Businesses should consider making asset purchases that qualify for the 50% bonus first year depreciation deduction.
- Depending on your particular circumstances, you may want to consider disposing of a passive activity to allow you to deduct suspended losses.
- Consider using a credit card to prepay expenses that can be taken as tax deductions in 2013.
- If you expect to owe state and local income taxes for 2013, consider increasing your withholding with your employer to get the deduction of these tax payments on your federal tax return if this does not expose you to alternative minimum taxes.
- If you made changes to your withholding taxes specific to 2013 tax liabilities, don’t forget to change your withholding beginning 2014 for your projected 2014 tax liability. They may not be the same.
With all tax planning, it is critical to plan early and plan often as the year progresses to receive the most options for tax advantages. Each person or business entity’s tax situation is unique and must be analyzed individually to achieve the most accurate results.
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