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Managing income taxes at year-end involves techniques designed to address three
issues: If a taxpayer expects to be in the same or a lower tax bracket
next year, it's best to defer as much income as possible until after the
year-end.
Accelerating or deferring
deductions: If a taxpayer's overall tax rate is the same in both years,
accelerating deductions achieves tax savings this year rather than waiting
for those tax savings to materialize next year.
Take advantage of tax provisions scheduled to
expire at the end of 2013. There are several temporary tax provisions
that can only be used this year.
Tax planning begins by projecting income and deductions for the year to
determine your tax bracket and income thresholds that trigger higher or
additional taxes, or limit the effectiveness of deductions. One of the impacts
of the American Taxpayer Relief Act of 2012, known as ATRA12, is the
reintroduction of the Pease limitation, which can greatly limit itemized
deductions. Once a taxpayer knows what his or her income taxes will look like,
it's time to evaluate which techniques will help the most.
Strategies to accelerate or defer income:
Taxpayers who participate in 401(k), 403(b), most 457
plans or in the Thrift Savings Plan can defer up to $17,500 this year.
Taxpayers age 50 and older can defer up to $23,000.
Harvest capital gains or
losses: Long-term capital gains are taxed at zero percent for taxpayers
in the 15 percent bracket. Capital losses can be used to offset capital
gains and reduce other income up to $3,000.
Use the IRA. Taxpayers age
59 1/2 and older can accelerate IRA distributions in 2013. Contributions may
be deductible depending on your income level and whether you're covered by a
retirement plan through work. Taxpayers under age 59 1/2 can convert
traditional IRAs to Roth IRAs to accelerate income.
Health-care assistance: People with health
savings accounts -- available with some high-deductible health insurance
policies -- can save up to $3,250 tax-deferred for an individual and $6,450
for a family. Those who are 55 and older can save an additional $1,000. Flex
spending contribution limits are capped at $2,500 this year.
Strategies to accelerate or defer deductions:
The
Affordable Care Act, known as the ACA, raises the income threshold this year
to 10 percent of adjusted gross income for taxpayers under age 65. The
threshold remains at 7.5 percent for those 65 and older. Taxpayers may need
to prepare or defer medical bills to lump expenses in a single year to get
the deduction.
Gifts to charities: Use a donor-advised
fund, known as a DAF, to maximize the tax savings from charitable giving. A
DAF makes gifting appreciated securities easier. The DAF can be funded in
tax years when the deduction will have the most impact. Distribution to
charities can be made at any time without tax consideration.
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Qualified charitable distribution:
This year only, taxpayers age 70 1/2 or older can choose to
direct up to $100,000 of their IRA-required minimum distribution
to charity. By doing so, the distribution does not show up as
taxable income, which can lower taxation of Social Security
benefits and help reduce other threshold levels to further
minimize taxes.
ATRA12 extended -- but did not make permanent -- several tax
incentives for individuals. Taxpayers should consider whether they
can benefit from these incentives this year and plan accordingly.
The following provisions are set to expire on Dec. 31 unless
extended again:
Taxpayers can choose between
deducting state and local income taxes or the sales taxes
they've paid through the year.
Deduction for
teacher expenses. Eligible educators can deduct up to $250
of any unreimbursed expenses.
Deduction of
mortgage insurance premiums. Payments of private mortgage
insurance premiums can be treated as deductible home mortgage
interest in 2013.
Discharge of
principal residence indebtedness. This can be excluded from
gross income this year.
Qualified charitable distribution.
Taxpayers can make tax-free charitable donations from their
required IRA distributions.
2013 is certainly an exciting year for tax planning. Start now in
order to minimize your tax bill in April.
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Certified Financial Planner Rick Rodgers is president of Rodgers
& Associates, "The Retirement Specialists," in Lancaster, Pa., and
author of "The
New Three-Legged Stool: A Tax Efficient Approach to Retirement
Planning." He's a certified retirement counselor and member of
the National Association of Personal Financial Advisors. Rodgers has
been featured on national radio and TV shows, including "Fox
Business News" and "The 700 Club," and is available to speak at
conferences and corporate events (www.rodgersspeaks.com).
[Text from file received from
News and Experts]
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