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2013 Year-End Financial To-Do List

Year end financial to-do list

Part of being an American adult is managing your finances. The more success you have, the more important it is to protect your assets. The more you fall on hard times, the more important it is to take advantage of any lifelines Uncle Sam is willing to throw at you. For many filers it will be useful – critical, even – to estimate taxes before 2013 recedes into history. It is still possible to make adjustments in your favor. Review your financial to-do list now, while several business days remain in the year.

Changes for 2013

According to Laura Saunders in The Wall Street Journal this year’s tax code includes:

  • two new taxes
  • a new top income-tax rate
  • a new top rate (20%) on long-term capital gains and dividends
  • a new inflation adjustment to the Alternative Minimum Tax (AMT) and
  • a couple of revived tax-benefit “phase-outs"

The top income earners are the hardest hit and are challenged by some tricky navigation if they hope to avoid paying more than they legally need to. For instance, a married couple with two children, the usual deductions, $230,000 in wages and $20,000 in investments are in the 28% income-tax bracket. But if they earn just an extra $10,000 their rate jumps to 38%.

The extra 10% comes from the blend of AMT and the new 3.8% net investment tax, which kicks in now. Taxes become even more onerous if there is “passive” income or increases from investments: a reasonable assumption given the market’s dramatic upswing. The same married couple could owe 13% above the nominal 15% on long-term gains. Online estimation tools provided by TurboTax, the Tax Policy Center or H&R Block can help you crunch the figures by comparing 2012 with 2013. Or see your CPA for a readout of revised projections.

Long-term capital gains

Starting in 2013, "long term capital gains tax rates are much more progressive than they have been in the past," notes Francine Lipman, William S. Boyd Professor of Law, University of Nevada, Las Vegas. "Because of that, you need to be thinking about taxable income."  Capital gains tax rates vary now from zero to 20%, depending on income level.

The personal exemption phaseout

PEP comes back, slightly altered, after an absence of three years. For households that do not come under the AMT, PEP can add a percentage point per tax-payer or dependent. Residents of states that do not have an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) are most affected. For instance, a family of 5 in Texas could expect to see an increase of 5% due to PEP.

Medicare

High earners will owe an extra .09% on wages above $250,000. This is in addition to the 2.9% Medicare tax for all workers.

And the "Medicare tax on investment income is new," Lipman points out. It's another reason to reduce income so as to avoid being subject to the tax.

Finally, AGI is now used to determine Medicare premiums. For high-income seniors, premiums could jump. "Now most people pay $124 per month. But high income individuals could pay three times that much," Lipman says.

Home office deduction

Self-employed taxpayers now have a simplified option for taking a home office deduction. Bert Seither, Director of Operations, Corporate Tax Network, explains:

"In January 2013, the IRS announced an alternative tax deduction option for self-employed taxpayers who claim home office expenses in order to conduct business. Instead of having to deal with complex mathematical calculations to determine your deductible amount, the IRS now offers a simplified option. You can claim $5 per square foot of home office space for up to 300 total square feet. The maximum deduction amount is $1,500 when utilizing this method. To avoid potential tax problems when claiming this deduction, you should only include expenses that are incurred specifically for things directly associated with doing business in a place of residence."

Paying taxesWays to mitigate tax liability

The holy grail for most of us at tax time is, of course, to minimize the Adjusted Gross Income (AGI). Four of this year’s increases have AGI thresholds. Juggling deductions won’t help. The AGI must be lowered.

The AGI is found on your tax return. If you filed Form 1040 last year, you'll find it on line 37; those who filed the 1040-A will see it on line 21; EZ filers will find it on line 4.

Professor Lipman advocates aggressive tax planning to minimize the AGI. "Think about your income level. Look at [deductions] you can manage," she explains. For example, taxpayers "who own rental property and who itemize their deductions can opt to pay the spring 2014 property tax installment now."

Maximize deductions. The key to reducing AGI is to increase deductions.

"Many business deductions and credits go unclaimed every year," notes Seither. "If you’ve incurred new or additional expenses in 2013, explore your deduction opportunities, such as writing off vehicle expenses or meals and entertainment. If you’ve hired certain kinds of employees or have added energy-efficient items to your home or business, you may be able to claim tax credits on this year’s income."

Most taxpayers should consider the following options for maximizing deductions:

  • Contribute to a tax-deductible IRA, 401(k) or defined-benefit retirement plan
  • Realize capital losses up to the amount of realized gains, plus $3,000
  • Favor tax-free Roth IRA income over taxable retirement payouts
  • Have tax-free municipal bond income
  • Deduct moving and job search expenses
  • Contribute up to $3,250 ($6,450 family) to a health-savings account
  • Make charitable contributions with appreciated assets rather than selling and giving the cash
  • Do an AMT check - which might be lower for you than previously
  • Take investment losses - but be alert to the wash-sale rule if you plan to buy back the losing asset
  • Maximize medical, dental and miscellaneous deductions. A long list of qualifying items is available in IRS Publication 502
  • Use expiring tax breaks like charitable rollovers for people 70 ½ and above; the state sales tax deduction in lieu of a state income tax deduction; the Section 179 expense deductions available to small businesses, and the $4,000 tuition and fees deduction. Click here to download the full list of expiring tax provisions.

Don't forget to account for any life changes, such as marriage, birth, death and employment status. Seither elaborates, "If you got married in 2013, you may be able to file taxes jointly with your spouse. If you had one or more children this year, you’ll likely be able to claim them as dependents on your tax return, which can reduce your tax liability. If you took a new job or lost a job, this could impact your income and therefore affect your tax obligations. The same goes for new small business owners or those who dissolved a company in 2013. In addition, the IRS is now allowing same-sex married couples to file jointly, so be sure to take this into account if it applies to you."

Student loans and your taxes

Students entering loan repayment in 2014 have the option of income-based repayment plans. "Married people [who wish to keep payments low] can elect to file separately, so that repayment is based on the borrowing spouse's income alone," says Lipman. "But there are traps for the unwary," she warns. "Seniors, for example, who file separately will find that the threshold for taxable social security benefits drops to zero, so that social security benefits become taxable when they wouldn't have been. And you can't take the Lifetime Learning tax credit of up to $2,000 if you file separately. You need to think about it in a holistic manner and consider the interrelatedness of all of your finances."

Healthcare

We're more than a year from filing our 2014 returns, but some decisions you make now will profoundly affect your tax liability then. Many low- and middle-income filers will face a tax credit reconciliation when they file their 2014 tax returns. The issue is that anyone signing up for health insurance now through a state or federal exchange must estimate 2014 income in order to see what the tax credit against the premiums will be. "But," cautions Lipman, "if your income is too high you might have to pay some back."  If you're unsure of next year's income, opt now to pay a higher premium (if you can afford it), which could result in a tax refund, rather than a liability, in 2015.

Distractions abound at this season of the year, but two or three hours spent on a forensic examination of last year’s filing vis-à-vis the year ahead might spare you a dose of consternation and regret on April 15, next.