4 Tax Planning Moves to Make Before Year End (from Market Watch)

With the end of the year approaching, it’s time to make some moves to lower your 2013 tax bill. This is the second installment of our two-part series on that subject (also see: Tax moves to make before Christmas).

Strategy: Prepay Deductible Expenditures

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2013 write-offs makes sense if you expect to be in the same or lower tax bracket next year. (See the tables at the end of this column for the 2013 and 2014 federal income tax brackets.)

January House Payment: Accelerating the house payment that’s due in January will give you 13 months’ worth of deductible interest in 2013 (unless you’ve already been following the prepayment drill). You can use the same strategy with a vacation home.

State and Local Taxes: Prepaying state and local income and property taxes that are due early next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher.

Charitable Donations: Prepaying charitable donations that you would otherwise make next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher. Donations charged to credit cards before year-end will count as 2013 contributions.

Medical Expenses and Miscellaneous Deduction Items: Consider prepaying expenses that are subject to deduction limits based on your AGI. The two prime candidates are medical expenses and miscellaneous itemized deductions. As explained earlier, medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be 65 or older as of year-end, the deduction threshold is a more-manageable 7.5% of AGI. Miscellaneous deductions—for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses—count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the 2%-of-AGI hurdle and getting some tax savings.

Warning: Prepaying Is Not a No-Brainer: The prepayment strategy can backfire if you will owe the alternative minimum tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions. So prepaying these expenses may do little or no tax-saving good for AMT victims. Solution: ask your tax adviser if you’re in the AMT mode before prepaying taxes or miscellaneous deduction items.

Strategy: Make Major Year-end Purchases and Deduct Sales Taxes

If you live in a state with low or no personal income taxes, consider making the choice to deduct state and local general sales taxes instead of state and local income taxes on your 2013 return. Most people who choose the sales tax option will use an IRS-provided table to calculate their allowable sales tax deduction. However, if you’ve hoarded receipts from your 2013 purchases, you can use your actual sales tax amounts if that results in a bigger write-off.

Even if you’re stuck with using the IRS table, you can still deduct actual sales taxes on a major purchase such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an aircraft, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle. So making a major purchase (or motor vehicle lease) between now and year-end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

Remember: the sales tax write-off only helps if you itemize. And if you’re hit with the AMT, you’ll lose some or all of the tax-saving benefit.

Strategy: Prepay College Tuition

If your 2013 AGI allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider prepaying college tuition bills that are not due until early 2014 if that would result in a bigger credit on this year’s Form 1040. Specifically, you can claim a 2013 credit based on prepaying tuition for academic periods that begin in January through March of next year.

  • The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000. The range for married joint filers is between MAGI of $160,000 and $180,000. MAGI means “regular” AGI, from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have.
  • Like the American Opportunity credit, the Lifetime Learning credit is also phased out if your MAGI is too high. However, the Lifetime Learning credit phase-out ranges are much lower, which means they are much more likely to affect you. The 2013 phase-out range for unmarried individuals is between MAGI of $53,000 and $63,000. The 2013 range for married joint filers is between MAGI of $107,000 and $127,000.

If your MAGI is too high to be eligible for the Lifetime Learning credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills that are not due until early 2014 if that would result in a bigger deduction on this year’s Form 1040. As with the credits, your 2013 deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2014.

Strategy: Give to Charity

If you have charitable instincts, here are two suggestions.

Donate Appreciated Stock; Sell Losers and Donate Cash: If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve held in a taxable brokerage firm account for over a year, consider donating them, instead of cash, to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and donate the cash sales proceeds. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Remember: you must itemize deductions to gain any tax-saving benefit from charitable donations, except for donations out of an IRA, as explained immediately below.

If You’ve Reached Age 70 1/2: Donate from Your IRA: You can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA, if you’ll be 70 1/2 or older by year-end. Such direct-from-your-IRA donations are called qualified charitable distributions, or QCDs. Because they are tax-free, and no deductions are allowed for them, QCDs don’t directly affect your tax bill However, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70 1/2. So you can avoid taxes by arranging for tax-free QCDs in place of taxable RMDs. Note that the QCD privilege will expire at the end of this year unless Congress extends it.

Don’t Overlook Estate Planning

For 2013, the unified federal gift and estate tax exemption is a relatively generous $5.25 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. You may also have state estate tax issues that need to be addressed. Finally, you may need to make some changes for reasons that have nothing to do with taxes (births, deaths, and so forth). Contact your estate planning pro if you think your plan might need a tune-up. Year-end is a good time to do it.

Click here for the full article.

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2013 changes to your Income Taxes

Even in a year with no changes to the tax laws, it’s often a good idea to do an income tax projection at some point during the year to see if there are ways to lower your tax liability or to avoid interest and penalties for underpayment. The article below details seven significant changes to the Federal Income Tax that may affect you.

Seven significant new income tax law changes went into effect at the beginning of the year as a result of two pieces of legislation: The 2010 Health Care Reform Act and the American Taxpayer Relief Act of 2012.

Although the new laws are primarily designed to increase taxes for those with higher levels of income, everyone with earned income is affected. With the first seven months of 2013 behind us, have you begun planning for these changes?

Increased Social Security tax

At a basic level, anyone with earned income has seen a reduction in take-home pay this year as a result of the first tax law change. The employee Social Security tax rate, which was reduced from 6.2% to 4.2% in 2011 and 2012, is back to 6.2%.

Combined with the increase in the maximum Social Security wage base from $110,100 in 2012 to $113,700 in 2013, maximum Social Security tax withholding has increased from $4,624.20 in 2012 to $7,049.40 in 2013. This has resulted in a total paycheck reduction of $2,425.20 for individuals reaching the maximum wage base.

Six changes for high income levels

There are a total of six changes to be aware of once your income exceeds the $200,000 single or $250,000 married filing joint (MFJ) levels. Two of the changes begin at these levels, two at $250,000 (single) or $300,000 (MFJ), and two at $400,000 (single) or $450,000 (MFJ), with different definitions of income associated with each change.

A summary of the six changes, which are also included on the 2013 Individual Federal Income-Based Tax Law Changes spreadsheet, including the income types and applicable income threshold amounts, follows:

1. Medicare earned income tax increase

The Medicare tax on earned income increased from 1.45% in 2012 to 2.35% in 2013 on earned income exceeding $200,000 (single) or $250,000 (MFJ) if modified adjusted gross income (MAGI) also exceeds these threshold amounts. While the percentage increase of 0.9% is about half of the Social Security tax rate increase of 2%, unlike the calculation of Social Security tax which is capped at a maximum wage base, there’s no limit on the amount of wages that are subject to the Medicare tax.

2. New Medicare investment income tax

The Medicare investment income tax is a brand new tax that penalizes individuals with MAGI exceeding $200,000 (single) or $250,000 (MFJ) with taxable interest, dividends, and capital gains, as well as rental, royalty, and nonqualified annuity income, otherwise known as “investment income.” A surcharge of 3.8% is assessed on the lesser of net investment income or MAGI in excess of the applicable threshold amounts.

3. Itemized deductions limitation

Repealed in 2010, the itemized deductions limitation was reintroduced this year to the dismay of individuals with adjusted gross income (AGI) exceeding $250,000 (single) or $300,000 (MFJ). It reduces otherwise allowable itemized deductions by 3% of the amount by which AGI exceeds the threshold amounts with some exceptions.

4. Personal exemption phase out

Also repealed in 2010, the personal exemption phase out reduces the personal exemption amount of $3,900 per individual in 2013. The amount of the reduction is 2% for each $2,500 in excess of AGI threshold amounts of $250,000 (single) or $300,000 (MFJ).

5. Income tax bracket increase

Individuals with taxable income (TI) of $400,000 (single) or $450,000 (MFJ) will see an increase of 4.6% in their top tax bracket, with the 2012 top bracket of 35% increasing to 39.6% in 2013 on income exceeding these thresholds.

6. Long-term capital gains and qualified dividends tax rate increase

The federal income-tax rate on long-term (assets held longer than one year) capital gains and qualified dividends increased from 15% to 20% for individuals with TI exceeding $400,000 (single) or $450,000 (MFJ).

When applicable, any one, let alone a combination, of the foregoing seven income tax law changes can result in a sizable increase in your 2013 federal income tax liability compared with 2012.

If you haven’t had a 2013 income tax projection prepared to determine the potential impact of the various changes on your tax situation, now’s the time to get it done. Trust me; you don’t want to wait until your 2013 tax returns have been prepared to unveil the damage.

Article above reposted from here.

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Year End Tax Planning

The 2013 tax year is almost over and it is the perfect time to do some end of year tax planning… before it is too late. Many tax planning decisions can only be made before December 31st.

The first step is to estimate or project your tax liability based on the information you have now recognizing that the final numbers are subject to change. The second step is to play the “what-if” game.

  • What if I sell my Ford stock for a capital gain?
  • What if I wait to pay my winter tax bill until next year?
  • What if I buy a new computer for my business?
  • What if my bonus is 50% bigger than it was last year?

The ultimate goal of a good tax plan is to lower your overall liability. But a secondary goal is to make sure you are not going to get penalized for underpaying your liability for the current year. Either way, the objective is to save you money.

Good tax planning can you save you substantial amounts of money… and help you avoid tax penalties and interest. I offer my clients a comprehensive tax plan based on your individual circumstances. Contact me today to get yours.

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Health Insurance Premium Tax Credit Calculator

Under the Affordable Care Act, individuals and families at or below 400% of the poverty level will be eligible for Health Insurance Premium tax credits under the Affordable Care Act. For a family of four, 400% of the poverty level is approximately $94,200 so many families will qualify for this tax credit.

Click here for a link to calculate your potential tax credit, and if you have questions about your personal situation please feel free to contact me using the phone number or e-mail on this website.

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New Method for Calculating the Home Office Deduction (Journal of Accountancy)

Very simply, the new method available for tax years 2013 and after, allows you to calculate your home office deduction by multiplying the square footage of your home office by $5 (max = 300 square feet or $1,500). The qualifications for taking the home office deduction remain the same.

See the full article from the Journal of Accountancy below:

In Rev. Proc. 2013-13, issued in January, the IRS gave taxpayers an optional safe-harbor method to calculate a deduction for expenses of a business use of a residence under Sec. 280A, effective for tax years beginning in 2013.

Individual taxpayers who elect this method can determine the deduction by multiplying the allowable square footage by $5. The allowable square footage is the portion of the dwelling used in a qualified business use, up to 300 square feet; thus, the maximum safe-harbor deduction is $1,500. The safe harbor is elected on a timely filed original tax return (instead of on Form 8829Expenses for Business Use of Your Home, which is used for the actual-expense method), and taxpayers are allowed to change their treatment from year to year. However, the election made for any tax year is irrevocable.

No depreciation is allowed for the years in which the safe harbor is elected, but it is permitted in years in which the actual-expense method is used. The revenue procedure gives detailed examples of how depreciation is calculated in a year after the safe-harbor method is used.

To use the safe-harbor method, taxpayers must continue to satisfy all the other requirements for a home office deduction, including that the space be used exclusively for the qualified business purpose and that an employee qualifies for the deduction only if the office is for the convenience of the taxpayer’s employer.

The deduction under the safe-harbor method cannot exceed the amount of gross income derived from the qualified business use of the home, minus business deductions unrelated to the qualified business use of the home. Unlike the limitation under the actual-expense method, however, a taxpayer cannot carry over any excess to another tax year; nor can there be any carryover from an actual-expense method year to a safe-harbor year. Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method, but not for qualified business use of the same portion of the home. The revenue procedure contains detailed rules for use of the home for part of the year. Taxpayers who have a qualified business use of more than one home for a tax year may use the safe harbor for only one home and must use the actual-expense method for the other home or homes.

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Lease versus Buy

It’s a question that you should ask every time you are deciding to buy a car or purchase a business asset of any significance… if you have the option to lease or to buy, that is. Often times the answer is not obvious even when you compare the monthly payments and any amount required to paid up front. Also, there are intangible benefits of both options that do not have anything to do with the money that often enter into the decision, but putting the numbers down on paper is necessary to see which option is financially better for you or your business. Please contact me if you need help in ‘crunching the numbers’ on your next lease versus buy decision.

Here’s a link to a useful lease versus buy calculator for an automobile.

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The Employer Mandate in the Affordable Care Act Delayed until 2015

A mandate in the Affordable Care ActPresident Barack Obama‘s signature domestic law, will be put partially on hold until 2015.

The mandate requires companies with at least 50 or more full-time employees to provide healthcare coverage or face penalties up to $3000 per worker. Large employer groups have welcomed the delay, while others are concerned it will leave too many Americans without insurance.

See full article here.

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Tax planning ideas for 2013 from the AICPA

It’s never too early to be thinking about tax planning for 2013… in fact, the sooner the better. Here’s a link to the AICPA’s 2013 tax planning guide.

Posted in 1040 Personal Income Taxes, 1065 Partnership Income Taxes, 1120 C Corporation Income Taxes, 1120 S Corporation Taxes, IRS, Personal Finance, Small Business | Comments Off on Tax planning ideas for 2013 from the AICPA

Waiting for your refund? IRS slowly catching up (USA Today)

The Internal Revenue service is catching up on processing tax returns in this delayed tax-filing season, but it’s still behind last year’s pace.

The IRS says it has processed 77.1 million tax returns through March 22, vs. 82 million from the same period last year. The average refund is $2,827 this year, down slightly from $2,860 last year.

The delay has a simple explanation — Congress — which didn’t agree on a number of tax rules until the very last minute. The IRS needed more time to update its computers and forms. As a result, it started processing returns about 10 days later than usual.

Nevertheless, they have been closing the gap. The IRS has processed 6% fewer tax returns vs. the same period last year, compared with a 13.1% gap March 1.

The IRS has accepted 72.5 million electronic returns this year, down from 75.1 million in the same period last year. So far, the government has made 57 million direct-deposit refunds totaling $171 billion. The average direct-deposit refund is $2,985, slightly below the $3,030 direct-deposit refund last year.

“It’s been an unusual season,” says Julie Miller, spokeswoman for Intuit TurboTax. “Consumer behavior has been pushed back a bit.” For example, delays in processing claims for Form 8863, the education tax credit, delayed more than 600,000 filers until mid-February. “People must be thinking that they’ll wait until the dust settles before they file,” Miller says.

Despite the delays, the number of those asking for extensions remains almost the same so far this year as the same period last year, Miller says.

But activity has been accelerating at TurboTax as the April 15 deadline draws near, Miller says. “There are millions of folks who have yet to file, and they will need to do so between now and two weeks from now. We’re anticipating a very busy two weeks.”


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Mid Year Tax Planning Ideas

From TaxSlayer.com… some of these are too late to do but will work for next year.

Although TaxSlayer.com can’t promise everyone a refund, we can say if you follow these 8 tips you should be on your way to a refund that should help you pay down your holiday debt!

  1. Charitable Donations– Take your gently worn goods to the Salvation Army or Goodwill.  Clean out your closet before the end of the year and receive a potential deduction that you will benefit from.  Now is also the time to start looking for all the cash donation receipts that you have received throughout the year.  Remember, the IRS needs you to substantiate every penny- so hold on to those receipts!
  2. Review your paycheck stub- Most people forget that they may have donated through their job or paid Union dues.  Always hold on to your last paycheck stub and review it for deductions.  If you have any questions on whether something is tax deductible or not use our helpful knowledge base.  We have hundreds of articles that can help.
  3. Child and Dependent care– Do you pay daycare expenses for a qualifying child that is under the age of 13 or had a dependent who was physically or mentally disabled and lived with you for more than half the year?  Did you pay for summer camp that specializes in soccer or computers?  If so, you need to start getting your receipts in order to claim the Child and Dependent care credit.
  4. IRA contributions– Normally, you have to claim your deductions by December 31, 2012 in order to take it on your tax return.  But if you qualify to deduct IRA contributions, you can make a contribution by April 16, 2013 and claim it on your 2012 tax return.  If you are in desperate circumstances this late deduction may be worth looking at in the near future.
  5. State taxes paid- If you were one of the ‘unlucky ones’ and owed state income taxes you may qualify to deduct that payment on your 2012 tax return.  If you owed your state income taxes and you paid them in 2012 you can deduct those as an itemized expense.  Review your check register and get your deduction this year!
  6. Alimony payments– Unfortunately, all relationships don’t work out.  If you and your former spouse have called it quits and you have to pay alimony don’t forget to write off those alimony payments.  Just look at it as the bright side to ending the relationship J.  And for the former spouse that is receiving alimony- your monthly payments are taxable and you must include them on your tax return.  One last point- child support isn’t eligible to be written off unless it is stated as an alimony payment in the divorce decree.
  7. Review your filing status– Most people don’t understand the power of choosing the correct filing status.  If you recently had a major life event such as getting married you can choose between Married Filing Joint versus Married Filing Separate.  In most cases, it will benefit most couples to file Married Filing Joint.  If you are unmarried and paid more than half the cost to keep up your home and have a qualifying dependent then choosing Head of Household versus Single will benefit you.  In addition, most people don’t know that they could claim a qualifying relative (such as a brother, sister, parent, or grandparent to name a few) that doesn’t live with them.  This could possibly change you from Single to Head of Household and/ or give you an extra deduction.  Check out our knowledge base for more information on filing status.
  8. Change your withholdings- Now is the time to look at your withholdings.  If you started working, received a raise, or took a pay cut these things could have an impact on your tax return for the upcoming year.  Go to your personnel department and look at your withholdings to make sure they are in line to meet your expectations for the New Year.  If they aren’t, complete another W-4 and submit it.
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