Friday, December 20, 2013

Tax planning strategies require careful consideration of taxable income

Gordon Dale for the NewsHerald writes: Tax planning presents more challenges than usual this year due to the passage of the American Taxpayer Relief Act of 2012, which was signed into law on Jan. 2, as well as certain tax provisions of the Patient Protection and Affordable Care Act of 2010 taking effect in 2013 and 2014.

Tax planning strategies for individuals this year — and for the next several years — require careful consideration of taxable income in relation to threshold amounts that might bump a taxpayer into a higher or lower tax bracket, thus subjecting him or her to additional taxes such as the Net Investment Income Tax or an additional Medicare tax.

Accelerating deductions

Here are several examples of what a taxpayer might do to accelerate deductions and your lower his or her 2013 income tax liability:


•Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.

•Pay your entire property tax bill, including installments due in year 2014, by year-end. This does not apply to mortgage escrow accounts.

•Try to bunch “threshold” expenses, such as medical and dental expenses (10 percent of AGI starting in 2013) and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

In cases where tax benefits are phased out over a certain adjusted gross income amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2013, depending on your situation.

The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Alternate Minimum Tax: The Alternative Minimum Tax exemption “patch” was made permanent by ATRA and is indexed for inflation. It’s important not to overlook the effect of any year-end planning moves on the AMT for 2013 and 2014.

Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.

Strategize tuition payments

The American Opportunity Tax Credit, which offsets higher education expenses, was extended to the end of 2017. It may be beneficial to pay 2014 tuition in 2013 to take full advantage of this tax credit, which is up to $2,500 per student.

Residential energy tax credits

Non-business energy credits: ATRA extended the non-business energy credit, which expired in 2011, through 2013 (retroactive to 2012). You may claim a credit of 10 percent of the cost of certain energy saving property that you added to your main home. This includes the cost of qualified insulation, windows, doors and roofs, as well as biomass stoves with a thermal efficiency rating of at least 75 percent.

In some cases, you may be able to claim the actual cost of certain qualified energy-efficient property. Each type of property has a different dollar limit. Examples include the cost of qualified water heaters and qualified heating and air conditioning systems.

To qualify for the credit, your main home must be an existing home located in the United States. New construction and rentals do not qualify. The credit has a maximum lifetime limit of $500; however, only $200 of this limit can be used for windows.

Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s credit certification statement. It is usually available on the manufacturer’s website or with the product’s packaging.

Other year-end moves
Retirement plan contributions: Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. (It doesn’t need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.)

If you are an employee and your employer has a 401k, contribute the maximum amount ($17,500 for 2013, plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don’t apply).

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.

Health Savings Accounts: Consider setting up a health savings account. You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.

In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 10 percent of AGI).

For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA. To be eligible, you must have a high-deductible health plan, and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare.

For 2013, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,250 (no change in 2014) for single coverage or $2,500 (no change in 2014) for a family.

Summary

These are just a few of the steps you might take. Please contact your CPA for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

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