To Our Clients and Friends -
As we approach year-end, it's again time to focus on last-minute moves you can make to save income taxes-both on your 2013 return and in future years.
For most individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the fiscal cliff legislation, passed early this year, increased the maximum rate for higher-income individuals to 39.6% (up from 35%). This change affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, and $425,000 for heads of households. In addition, the new 0.9% Medicare tax and 3.8% Net Investment Income Tax (NIIT) kick in when modified adjusted gross income (or earned income in the case of the Medicare tax) goes over $200,000 for unmarried, $250,000 for married joint-filing couples, which can result in a higher federal tax rate for 2013.
Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. This letter presents a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.
1. Ideas For Your Business
Take Advantage of Tax Breaks for Purchasing Equipment, Software, and Certain Real Property
If you have plans to buy tangible business property, or to make certain improvements to real property, you might consider doing so before year-end to capitalize on the following generous, but temporary tax breaks:
Inventory for Damaged or Obsolete Items
- Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction for the entire cost of new and used equipment and software additions.
- Section 179 Deduction for Real Estate. Real property costs are generally ineligible for the Section 179 deduction privilege. However, an exception applies to tax years beginning in 2013.
- 50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can claim first-year bonus depreciation equal to 50% of the cost of most new equipment and software placed in service by December 31 of this year.
Inventory is normally valued for tax purposes at cost, or the lower of cost or market value. Regardless of which of these methods is used, the end-of-the-year inventory should be reviewed to detect obsolete or damaged items.
Employ Your Child
If you are self-employed, don't miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction.
Read More about these ideas for your business.
2. Ideas for Maximizing Nonbusiness Deductions
Make Charitable Gifts of Appreciated Stock
If you have appreciated stock that you've held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity.
Don't Lose a Charitable Deduction for Lack of Paperwork
Charitable contributions are only deductible if you have proper documentation! For cash donations of $250 or more you must obtain, by the time your tax return is filed, a charity-provided statement that shows the amount of the donation.
Maximize the Benefit of the Standard Deduction
For 2013, the standard deduction is $12,200 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,100. Currently, it looks like these amounts will be about the same for 2014. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions every other year.
Manage Your Adjusted Gross Income (AGI)
Many tax breaks are only available to taxpayers with AGI below certain levels. For that reason, taking advantage of strategies that lower your taxable income may increase some of your other tax deductions and credits.
Read More about maximizing non-business deductions.
3. Make the Most of Year-End Securities Transactions
As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities. For most taxpayers, the federal tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term gain tax rate.
Biting the bullet and selling some loser securities before year-end can also be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less.
Identify the Securities You Sell
If you choose, you can specifically identify the shares you're selling when you sell less than your entire holding of a stock or mutual fund. This sales strategy gives you better control over the amount of your gain or loss, as well as determining whether it's short or long-term.
Secure a Deduction for Nearly Worthless Securities
If you own any securities that are all but worthless, with little hope of recovery, you might consider selling them before the end of the year, so you can capitalize on the loss this year.
Read More about making the most of year-end securities transactions.
4. Ideas for Seniors Age 70 1/2 Plus
Make Charitable Donations from Your IRA
IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. Be careful-to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity.
Take Your Required Retirement Distributions (RMD's)
The tax laws generally require individuals with retirement accounts to take withdrawals, based on the size of their account and their age every year after they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There are some options for 2013, though - qualified charitable deductions count.
Read More about these ideas for seniors age 70 1/2 plus.
5. Ideas for the Office
Maximize Contributions to 401(k) Plans
If you have a 401(k) plan at work, contribute as much as you can stand, especially if your employer makes matching contributions.
Take Advantage of Flexible Spending Accounts (FSAs)
If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2014 salary to convert into tax-free contributions to the plan. FSAs are "use-it-or-lose-it" accounts - don't set aside more than what you'll likely have in qualifying medical and dental expenses for the year.
Married couples who both have access to FSAs will also need to decide whose FSA to use.
Adjust Your Federal Income Tax Withholding
As stated at the beginning of this letter, higher-income individuals will likely see their taxes go up this year. This makes it more important than ever to do the calculations to see where you stand before the end of the year. If it looks like you are going to owe income taxes for 2013, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year.
Read More about saving on taxes at the office.
6. Don't Overlook Estate Planning
For 2013, the unified federal gift and estate tax exemption is a historically generous $5.25 million, and the federal estate tax rate is a historically reasonable 40%. (The annual gift exclusion amount is $14,000 per year.) Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes for reasons that have nothing to do with income, estate or gift taxes.
Through careful planning, it's possible your 2013 tax liability can still be significantly reduced, but don't delay. The longer you wait, the less likely it is that you'll be able to achieve a meaningful reduction. The ideas discussed in this letter are a good way to get you started with year-end planning, but they're no substitute for personalized professional assistance. Please don't hesitate to call us with questions for reducing your tax bill, or for planning for your 2013 income tax liability.
Very Truly Yours,
Wittenberg CPA, PS