Whether over the river and through the woods or merrily preparing your holiday decorations, the last thing you want to think about is tax planning. However, waiting until January to address any strategies to reduce your 2013 tax burden is a bit too late. There have been quite a few tax law changes for 2013 just at the federal level:
• .9% additional Medicare tax on earned income over $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly
• 3.8% Medicare tax on unearned income (interest, dividends, capital gains, passive income, etc) above $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly
• Higher capital gains rates
• Higher marginal income tax rates (10%, 15%, 25%, 28%, 33%, 35%, 39.6%)
• Phase out of itemized deductions and personal exemptions
Year-end tax planning provides a snapshot of what has happened for the year and what can be done to minimize the tax burden. With less than two months remaining, you should be asking yourself: what outstanding income, deductions and credits do I have and should I pay/collect in the current year or defer until 2014. There are some North Carolina tax law changes coming in 2014 that will impact quite a few people as well. Taking action before the end of 2013 may provide an opportunity for even greater deductions at the North Carolina level too.
Typically, if you expect your income to increase next year, accelerating income received this year will result in greater tax savings while deductions and tax credits deferred until next year would be more valuable. The opposite is true if you expect your income to go down next year.
A few strategies to consider as the year-end approaches:
Review your earned income. If you’re eligible for a bonus, determine whether to take it this year or if it is more beneficial, and your employer allows it, defer the income until 2014. If you are self-employed and believe your income will be much higher in 2014, accelerate your billing and increase payment collections this year.
Check your loss carry-forwards from last year and review your realized and unrealized gains and losses. Harvest capital losses in high income years to offset capital gains and lower income to keep you out of higher tax brackets. Harvest capital gains in low income years can fill up the lower tax brackets.
Maximize retirement contributions through 401K, 403B, 457 plans. Don’t forget the additional catch up contribution amounts if you are over 50 years of age.
Take required minimum distributions (RMD). If you expect your income to be greater in 2014, take an amount greater than the calculated RMD to accelerate income in 2013. Another caveat, you can contribute up to $100,000 of your RMD by directly sending it to a qualified charity. This charitable contribution rule currently expires at the end of 2013.
Timing of itemized deductions. Taking itemized deductions in high income years or deferring itemized deductions to later higher income years in order to manage the tax brackets. Know your income level as phase outs return for tax year 2013.
Watch out for AMT. Overlooking the alternative minimum tax can make certain year-end strategies counterproductive.
These are a few ideas to think about as you’re making your holiday shopping list. Tax planning is unique to each individual’s situation at both the federal and state level. Consulting with a tax professional can Blackman & Sloop, CPAs, P.A. can help you sort through this maze.
About Blackman & Sloop CPAs, P.A.:
Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com
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