Things you can do now to save on your 2013 taxes

Nedra Rhone for the AJC writes: Holiday season has only just begun and the last thing you’re probably thinking about is tax season. But anyone hoping to best position themselves for what is sure to be an interesting tax year should probably give it a little brain power.

“For the last several years, Congress has given the taxpayers and the tax community these little jolts. They are at the point where they are making up tax laws for the year that has passed,” says Merry Brodie, an enrolled agent with Atlanta-based Brodie Accounting Services, which helps individuals and small businesses with tax planning and filing.

With taxes as a moving target, preparation is all about planning. Here are some things Brodie says you can do right now to get ready for what’s ahead and possibly save on your taxes.

Get organized. Start gathering receipts and other items needed to support your 2013 returns, says Brodie. Daycare receipts, health expenses and pay stubs all act as supporting documents for your returns.

Review the past. Sit with your old tax returns and current pay stubs and do an estimated tax return for 2013. If you can’t do it yourself, spend about $50 to have a professional do it for you, says Brodie. The objective is to get an early idea of your tax liability so you can make proper adjustments.

Spend money to save money. “Everybody wants to save money on taxes and it takes money to save money,” says Brodie. Actions such as increasing your 401K payments in these next few months or determining how much to allocate in the following year to medical reimbursement or dependent care accounts require you to pay pre-tax money, but doing so reduces your adjusted gross income (AGI). The lower your AGI, the less you owe the government. You may even be able to do something as simple as adjust the withholding on your last few paychecks of the year to help bring your tax payments in line with your tax liability.

Be generous. Charitable donations can help you reduce taxes owed as long as you itemize your return. But be warned, a few $25 donations and a couple of Goodwill receipts are probably not going to help you much, Brodie says.

Know the law, act accordingly. It helps to be aware of tax law changes in any given year, says Brodie. In 2013 for example, higher income individuals — singles with income of $200,000 or more or marrieds filing jointly with income of $250,000 or more — will pay more taxes. Medical expense deductions for anyone under 65 increase from 7.5 percent to 10 percent of income, which means fewer people will qualify. In addition, the forgiveness debt on home foreclosures, sales tax deduction, private mortgage insurance deduction, teacher’s classroom supplies deduction, tuition and fees deduction and the residential energy tax credit are currently only good for 2013. Taking action in these areas before the end of the year will put you in a position to take those deductions.

Don’t overlook the details at home. So many people are focused on their federal returns, they may forget about Georgia deductions. Parents of children in private schools can get a $2,000 credit on state taxes for donating scholarship funds to the school. Seniors 62 and older often forget to take their retirement income exclusion, says Brodie, which allows them to set aside $35,000 in non-taxed income, even if they aren’t retired yet.

Consider the power of three. There is nothing wrong with doing your own taxes, says Brodie, but every three years it’s a good idea to have an enrolled agent — a professional qualified to represent taxpayers before the Internal Revenue Service — complete or review your work. That way, if you missed something, you will still have time to file an amended return.

Tricks to avoid a scary tax bill next year / Careful year-end planning could take the bite out of the tax bill when tax season hits.

Susan Tompor for the Detroit Free Press/USA Today writes: We've yet to see this one at our house, but many years we joke that the scariest costume on Halloween could be an IRS agent showing up at your door. Maybe the little kid could skip the costume and just hand out copies of the 1040?

Here, kid, take all the really good candy we've been hiding for ourselves and go!

Right now, many of us would like to move into November thinking about carving that turkey instead of figuring out how to cut our taxes. But careful year-end planning could take the bite out of the bill when tax season hits.

Be warned, though, that it could take a bit longer to receive your refund cash, thanks to the 16-day federal government shutdown. The start of the 2014 filing season will be delayed by about one week to two weeks. More details will be announced in December.

James Jenkins, president of Jenkins accounting firm in Southfield, said some people who depend on big refunds might want to consider changing their withholdings now to see more of their paycheck.

Other tips:

• How does a 0% rate on long-term capital gains sound? It's not some ghostly vision.

• Some retirees and others might want to review their income for the past year, talk to their tax preparers and consider selling some stock they have held for more than a year at a gain.

• The 0% long-term capital gains rate applies in 2013 if a married couple filing jointly has taxable income of $72,500 or less; the limit is $36,250 for single filers.

• If you hold onto stock for longer than 12 months, you can benefit from a reduced tax rate on long-term capital gains.

But remember, your taxable income is going to include capital gains.

One option to consider: Sell some stock at a loss in 2013 to offset some gains.

George W. Smith IV, a certified public accountant and partner at George W. Smith in Southfield, said some investors might want to harvest capital losses before year-end to avoid the new 3.8% excise tax on net investment income, too. The new tax kicks in for higher income households.

The big news in 2013 is that the top capital gains rate has climbed up to 20% from 15% last year. The change was made as part of a last-minute fiscal cliff deal reached during the final hours of 2012.

The maximum 20% long-term capital gains rate applies to married couples filing jointly with taxable income above $450,000 and singles above $400,000.

Smith noted that the net investment income tax effectively turns that 20% rate into a 23.8% rate.

A 15% capital gains rate applies to households between $72,501 and $450,000 for married couples filing jointly; the limit for singles is $36,251 and $400,000.

A new tax that's part of the Affordable Care Act hits in 2013.

Under the new law, taxpayers could be subject to an additional 3.8% tax on net investment income. This tax would apply only to married couples whose adjusted gross income exceeds $250,000 if filing jointly, and singles whose adjusted gross income exceeds $200,000.

The 3.8% tax does not apply to money taken out of a qualified retirement plan or IRA.

But this year, tax experts warn that someone might think twice about converting a traditional IRA into a Roth IRA. That's because the required inclusion of income from that conversion would drive up your adjusted gross income.

Tim Steffen, director of financial planning at Robert W. Baird, an investment banking firm based in Milwaukee, said multiyear planning could be necessary where someone does smaller conversions over a few years to avoid extra taxes.

An additional Medicare tax of 0.9% on gross income from wages and self-employment would be imposed on taxpayers earning more than $200,000 single or $250,000 for joint-filers.

Given the new tax, some taxpayers want to make sure they're having enough money withheld by year-end 2013, said Jim Van Grevenhof, senior tax analyst at Thomson Reuters.

Are you the sort who likes to hand out big candy bars at Halloween? Do you want to give a chunk of your IRA to charity?

Van Grevenhof said some IRA owners and beneficiaries who are 701/2 or older might find this tax break attractive, if they're making sizable charitable contributions, anyway. The tax benefit is that the money from the IRA is not included in your taxable income, as would be the case otherwise. Up to $100,000 would be permitted to be donated directly from IRAs. No, you do not get a charitable deduction, as well. But you've essentially taken an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs, Van Grevenhof said.

Mark Luscombe, principal analyst for CCH, a Wolters Kluwer business, said if someone were interested in making a one-time gift out of an IRA, it might be better to do so this year because it's unknown if the tax break would still be around in 2014. The provision currently expires in 2013.

It's best not to wait until the last week in December to try this one, though. The money must be directly transferred to the charity from the IRA; you cannot withdraw the money yourself and send a check and claim this tax break.

Save for Retirement—or College? / Financial experts offer some tips on how to handle this juggling act so many families face

Lisa Ward for the Wall St. Journal writes: It's the fundamental financial conflict that many families face: saving for college vs. saving for retirement.The pressure is intense on both sides. College costs continue to outpace inflation, with the average price for four years of private college now at a terrifying $158,000. Meanwhile, the pressure to build a large nest egg for later life has grown due to longer retirements, dwindling pensions and uncertainty about Social Security and Medicare.

So how do financial experts recommend juggling these two savings goals? Here are some of their pointers.

Prioritize Retirement

Here's a piece of advice that's tough for many parents to swallow: It is more important to save for retirement than for college. It may sound selfish, even irresponsible. But it's true

"Unless your retirement plan is for your children to take care of you, retirement funding must come before education funding," says Rick Lowe, a senior financial adviser at the Ayco Co. unit of Goldman Sachs Group Inc.

The reason is simple: Saving is the primary way you can fund your retirement, especially if Social Security is unlikely to replace a significant portion of lost income and you aren't entitled to a big company pension.

College, though, can be funded many ways. For the 2012-13 school year, parents on average paid 27% of college tuition from income and savings, according to Sallie Mae. The rest came from grants and scholarships (30%), student loans (18%), student income and savings (11%), parent borrowing (9%), and relatives and friends (5%).

New Baby? Think College

Putting yourself first doesn't mean you don't worry about the kids at all. But it does mean you need to start worrying as early as possible. Because the sooner you start saving for college, the smaller the drain it will be on your budget, leaving you more money to fund your retirement.

Maria Bruno, an investment analyst at Vanguard Group, says parents should start saving when a child is born. According to Vanguard's online calculator for college costs, parents who save $300 a month from the time a child is born can expect to have about $120,000 put away when it's time for college. But if they start saving that same amount when the child turns 10, they don't just fall behind by the amount they didn't save all those years; they also miss out on all the money those savings would have earned. They end up with only about $50,000.

Minimize Taxes

Another way to minimize the drain from college savings, freeing up more money to put away for retirement, is to save on taxes. Financial advisers recommend using a state-sponsored 529 college-savings plan.

Thirty states give a tax deduction to residents who invest in a 529 run by that state, according to Morningstar Inc. Six others offer a tax benefit to residents who contribute to any 529.

In a 529, the money compounds free from all taxes and can be withdrawn tax-free to pay for qualifying college costs.

Other Options

One drawback of a 529: Earnings are subject to tax and a 10% penalty if they aren't used for education. Similarly, there is a 10% penalty in most cases if you take money early from a 401(k) for education—if your plan even allows such withdrawals, which many don't. So you may want to put at least some savings in investments that can be used for either college or retirement, to keep your options open.

One option is U.S. Treasury inflation-indexed savings bonds, known as I bonds. If an I bond is held for at least five years and then redeemed to pay for your kids' college expenses, the interest is free of federal taxes if annual income is below $72,850 for an individual or $109,250 for a couple. The tax is reduced if income is below $87,850 for an individual or $139,250 for a couple. If you hold the bonds for retirement, you pay taxes on the interest when they are redeemed.

Roth individual retirement accounts also offer flexibility. With a Roth, which is funded with after-tax dollars, contributions can be withdrawn without penalty after five years, notes Morningstar analyst Adam Zoll. If earnings are withdrawn before age 59½, they are taxed as ordinary income. But a 10% penalty on those earnings is waived if the money is used for college. With a traditional IRA, the early-withdrawal penalty is waived for education expenses, but all withdrawals are taxed as income.

Just remember that this approach isn't ideal. "Most people don't do a good job saving for retirement, so diverting money from long-term retirement goals is a dangerous proposition," says Jay LaMalfa, a partner and financial adviser at Macro Consulting Group in Parsippany, N.J.

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