Wednesday, December 18, 2013

5 Tax Moves to Make for 2014

Chad Fisher for GoBankingRates.com writes: In the midst of the holiday season, it’s never too early to look forward to the coming new year and the April 15 tax filing deadline that follows.
Long before you pull out your 1099 forms, W-2s and 1040s, and boil that pot of coffee for the long night ahead in front of your computer screen and tax reporting software, take a minute to consider today how tax law changes in 2014 will affect you — and what moves you can make now to reduce your tax burden next year.

5 Tax Moves to Consider in 2014

For most of us, the process of tax reporting for 2014 is relatively unchanged from the prior year. Individuals who are considered high earners, starting with those making $200,000 as an individual or $250,000 as a married couple filing a joint return, are affected by some of the following changes that were made for this year:
  1. Social Security tax was increased from 4.2 percent in 2012 to 6.2 percent, with the maximum threshold income raised 3.3 percent ($110,100 in 2012 to $113,700 in 2013), or an additional $2,425.20 for those individuals who earn the maximum amount.
  2. Medicare tax also increased in 2013, up to 2.35 percent, up from the prior year’s amount of 1.45 percent. There is no maximum threshold income for the Medicare tax.
  3. The top tax bracket has been raised to 39.6 percent for incomes in excess of $400,000 (individual filers) and $450,000 for those who are married filing jointly.
  4. Itemized deductions and personal exemptions are impacted by what is known as the “Pease limitation” (named for former Congressman Donald Pease of Ohio). Higher earners of at least $250,000 in adjusted gross income (AGI) individual — or $300,000 AGI married, filing jointly — will see a reduction in the amount of itemized deductions taken for charitable contributions, mortgage interest, state, local and property taxes paid, as well miscellaneous itemized deductions.
  5. The rate on long-term capital gains and qualified dividends earned has increased in 2013 from 15 percent in prior years to 20 percent in 2013. This change affects earners making at least $400,000 as an individual or $450,000 as a married couple filing jointly.
If you are impacted by any of these changes, consider making several of the following moves that could lower taxable income or provide meaningful tax deductions at filing time:

Make Charitable Contributions

Individuals comprise 71 percent of all charitable gifts made in 2012 ($223 billion of $316.23 billion). Even with the changes brought on by the Pease limitation for earned income in excess of $250,000, charitable giving during the holidays still remains a powerful way to reduce your tax bill.
Contributions of cash made to a qualified charity can be deducted up to 50% of your AGI while non-cash assets can be deducted up to 30 percent of AGI.
Be mindful, however, that any such gift must be made on or before Dec. 31, 2013 in order to be deductible.

Contributing to a Qualified Retirement Account

Contributions made to an individual retirement account (IRA) could be deductible, subject to income limitations as well as any amount that you contribute to an employer-sponsored retirement plan. For 2013, you are permitted to contribute up to $5,500 to an IRA (or an additional $1,000 as a make-up contribution for individuals age 50 and older). Such contributions should be made as early as possible. Contributions made to a Roth IRA do not qualify for tax deductibility.

Income Deferral for High Earners

While work bonuses are certainly appreciated during the holidays, you might want to think twice before accepting.
As mentioned above, the top income tax bracket is 39.6 percent for incomes that exceed $400,000 or $450,000 depending on your filing status. For many high earners, holiday bonuses and other incentives can push base salary well above the threshold for the higher income tax bracket. A way to avoid moving into the higher bracket is by politely deferring those dollars that put you over the threshold to after Jan. 1, 2014. Such receipt will be considered taxable income for the next year.
Review as early as you can the impact tax law changes have on your tax situation in order to determine what approach is best for you. While April 15 remains an important tax deadline for the majority of Americans, you could still save yourself money by making these smart tax moves before the new year hits.

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