President Franklin Roosevelt once said, “The only thing we have to fear is fear itself.” But I suspect that President Roosevelt probably never had to deal with the constantly changing tax environment that Congress throws our way every year. The uncertainty of taxes can be unsettling, particularly for individuals. Have you ever received your tax return and felt shocked when you saw how much you owed in taxes? You can avoid that awful feeling and have a better idea of what you might owe by simply looking at your tax situation periodically throughout the year. This is especially important this year because of the various new taxes that kick in at specific income levels, including the 3.8 percent investment income tax and the 0.9 percent additional Medicare tax.
When you start planning and projecting what your taxes might look like at the end of the year, you have the ability to make changes and take actions to make your situation a more favorable one. In other words, the first step is gaining a better understanding of your specific tax situation. Then you can start looking at some of the various tax planning opportunities to see which ones might be applicable and beneficial to your situation.
Consider taking advantage of these tax savings opportunities:
Accelerate deductions into 2013 and postpone income to 2014
This is the old standard in tax planning, but it can be very effective. Individuals file on the cash basis so they have the ability to control deductions simply by paying them in the current year rather than right after the year-end. You can also try and work with your employer to “push-out” any bonus you might receive until 2014.
Contribute to a health savings account (HSA)
You can make a full year’s worth of deductible HSA contributions in December. Consider making the late HSA contributions if you recently became eligible to make HSA contributions or you had not previously contributed the max and still have excess out-of-pocket medical expenses. Or, you might be able to contribute to get the deduction and immediately reimburse yourself for the expenses you had already paid.
Take advantage of bonus depreciation / Section 179
Consider purchasing any equipment for your Schedule C (sole-proprietorship) before the end of the year to take advantage of the 50 percent bonus depreciation and/or Section 179 deduction.
Pay state & local taxes / estimates by the end of the year
State & local taxes are deductible when paid, so make your estimated payments by Dec. 31 to get the deduction in 2013. But you should understand your current tax situation – if you are subject to alternative minimum tax (AMT), then you might not see any benefit from making these payments in 2013.
Prepay your real estate taxes
Similar to state and local taxes, real estate taxes are deductible in the year paid. However, be mindful of AMT to ensure that you receive the full benefit of the deduction.
Consider applying a bunching strategy
Consider the possibility of “bunching” real estate taxes, medical expenses, miscellaneous itemized deductions and other itemized deductions into specific years. This may help you exceed the standard deduction that you might not ever exceed if you paid all expenses/deductions in the year to which they relate.
“Harvest” capital losses
You can deduct up to $3,000 per year of capital losses against ordinary income. Consider selling stock to generate a capital loss that could be used to offset ordinary income.
Maximize your retirement plan contributions
There are a variety of retirement plans that have different maximum contribution levels. Consider increasing your contributions to the various pre-tax retirement plans that you have established to increase your current year deduction.
Record your volunteer activities
Keep track of your mileage and other out-of-pocket expenses you spend while volunteering for various non-profit organizations in order to claim a deduction in 2013.
Donate appreciated stock
Rather than writing a check or giving cash to a charitable organization, consider donating appreciated stock. When you donate appreciated stock you can deduct the fair market value of the stock (rather than the lesser amount that you paid for it) and you don’t have to report any capital gain from the stock on your tax return.
Use the residential energy tax credit
Consider making energy saving improvements to your residence in order to take advantage of the tax credits that may be available. These improvements would include things such as installing energy savings windows, energy efficient heaters/air conditioner, adding insulation, etc.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 11/20/2013.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.