With only a month until 2013 ends, a few smart tax moves now can make a meaningful difference on this year’s tax bill. Before proceeding, it may be helpful to understand some of the major changes affecting taxpayers in 2013.
A new tax rate schedule affects all individual taxpayers in 2013. Below are the rate schedules for married taxpayers filing joint returns in 2012 and 2013.
Married taxpayers with adjusted gross incomes (AGIs) greater than $250,000 ($200,000 for single taxpayers) will now have to pay a new 3.8 percent Medicare tax on unearned income. Some examples of unearned income include dividends, interest and capital gains.
Personal exemptions and itemized deductions will be phased out as AGI exceeds $300,000. This means that deductions such as mortgage interest and property taxes will be reduced gradually as your income starts to exceed $300,000.
All these changes mean some taxpayers will be facing higher tax bills in 2013. With that, here are a few tax savings ideas that can make a big impact.
- Consider taking capital losses to offset capital gains (especially short-term losses to offset short-term gains). Taxed up to 43.4 percent, short-term gains lose a lot of value. Attempting to structure gains so you are in a net long-term gain position each year and taxed at a maximum 23.8 percent may result in better long-term returns on an after-tax basis.
- Don’t make property tax payments or charitable contributions before year-end if your AGI will exceed $300,000 and a large portion of your deduction will be phased out. For example, a taxpayer may be contemplating a $30,000 gift to charity before year’s end. From a tax perspective, this might not make a lot of sense for a taxpayer with $1,000,000 of AGI who would lose $21,000 of his $30,000 charitable deduction.
- Maximize 401(k) and other retirement contributions. It’s an easy solution to provide immediate tax savings and also allow contributions to growth on a tax-deferred basis in future years.
- Give appreciated securities to charity instead of selling the securities and giving the cash. You will generally get the same charitable deduction but avoid having to recognize the extra capital gain.
- Consider investing in tax-exempt bonds. At the maximum tax rate of 43.4 percent, a taxpayer earning 5 percent on a tax-exempt bond is earning the equivalent of 8.83 percent on a fully taxable bond.
- Consider placing machinery, equipment, furniture and certain other assets in service before Dec. 31, 2013, to take advantage of the following immediate expensing provisions before they go away.
- The Sec. 179 election to expense property immediately will decrease from $250,000 in 2013 to $25,000 in 2014.
- Fifty percent bonus depreciation will not be available after 2013 for most assets.
- When appreciated property is to be sold, consider whether a Sec. 1031 exchange of the property for equivalent property might make sense to allow for deferral of the income tax consequences.
- If you own rental real estate or a business, consider becoming active in the operations to avoid the new 3.8 percent Medicare tax.
The ideas above are just a few of a multitude to help you make a meaningful cut in your 2013 tax bill. Start planning now. Otherwise, a nasty surprise may be waiting for you on April 15, 2014.
Bennett Allison, CPA, CFP, is a shareholder at Sol Schwartz & Associates, PC. He has 16 years public accounting experience serving individuals, corporations, S corporations, partnerships, trusts, estates and nonprofit organizations. In addition, Allison works with a high concentration of physician practices and high net worth individuals. Contact him at 210-384-8000, ext. 138, or firstname.lastname@example.org.