Year-End Tax Planning for 2013

December 16, 2013 by Beverly Schleper
Copeland Buhl

As the year draws to a close, many of you will find yourself getting your 2013 tax and financial “ducks in a row.” The following checklist may help you save tax dollars if you act before year-end. Not all actions will apply in your situation, but you may benefit from many of them.

  • New this year is the 3.8% surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages in excess of $200,000 ($250,000  if you are Married Filing Joint (MFJ) and $125,000 if you are Married Filing Separate (MFS)). The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for MFJ, $125,000 for MFS, and $200,000 for Single). Some taxpayers should consider ways to minimize additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others will need to consider ways to minimize both NII and other types of MAGI.
  • Employers must withhold the additional .9% Medicare tax from wages in excess of $200,000. Self-employed people must take it into account in figuring estimated tax. Additional tax payments may be due from an individual with multiple employers.
  • If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2013.
  • Realize losses on stock while substantially preserving your investment position. For example, you can sell the original holding, and then buy back the same securities at least 31 days later.
  • Postpone income until 2014 and accelerate deductions into 2013. This may enable you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of adjusted gross income. These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable if you anticipate being in a lower tax bracket next year. Note that in some cases it may pay to accelerate income into 2013. For example, where a person’s marginal tax rate is much lower this year than it will be next year, or where lower income in 2014 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as they are, you will wind up paying a higher tax than is necessary. You can back out of the transaction by re-characterizing the rollover or conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • It may be beneficial to arrange with your employer to defer a bonus until 2014.
  • If you expect to owe state income taxes, consider increasing withholding of state taxes (or make estimated state tax payments) before year-end to pull the deduction into 2013, if doing so won’t create an alternative minimum tax (AMT) problem.
  • If you are a homeowner, make energy-saving improvements to the residence, such as putting in extra insulation or an energy-efficient HVAC system. You may qualify for a tax credit if the assets are installed before 2014.
  • If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee.
  • Take required minimum distributions (RMDs) from your retirement plans if you have reached age 70-1/2. Failure to do so can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first RMD to 2014, but if you do, you will have to take a double distribution in 2014–the amount required for 2013 plus the amount required for 2014. Think twice before delaying 2013 distributions to 2014, as bunching income into 2014 might push you into a higher tax bracket or affect various tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2014 if you will be in a substantially lower bracket in 2014.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals.
  • Self-employed? Consider purchases that qualify for business property expensing. For tax years beginning in 2013, the expensing limit is $500,000.  It is scheduled to drop to $25,000 for tax years beginning in 2014. Many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.
  • If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

These are just some of the year-end steps that can be taken to save taxes. Please contact us and we can tailor a particular plan that will work best for you.

Bev Schleper