You don’t want to pay any more in tax than you have to. That means tak­ing advan­tage of every strat­e­gy, deduc­tion, and cred­it that you’re enti­tled to. How­ev­er, the win­dow of oppor­tu­ni­ty for many tax-sav­ing moves clos­es on Decem­ber 31, so it’s impor­tant to eval­u­ate your tax sit­u­a­tion now, while there’s still time to affect your bot­tom line for the 2013 tax year.

 

Timing is everything

Con­sid­er any oppor­tu­ni­ties you have to defer income to 2014. For exam­ple, you may be able to defer a year-end bonus, or delay the col­lec­tion of busi­ness debts, rents, and pay­ments for ser­vices. Doing so may allow you to put off pay­ing tax on the income until next year. If there’s a chance that you’ll be in a low­er income tax brack­et next year, defer­ring income could mean pay­ing less tax on the income as well. Sim­i­lar­ly, con­sid­er ways to accel­er­ate deduc­tions into 2013. If you item­ize deduc­tions, you might accel­er­ate some deductible expens­es like med­ical expens­es, qual­i­fy­ing inter­est, or state and local tax­es by mak­ing pay­ments before year-end. Or, you might con­sid­er mak­ing next year’s char­i­ta­ble con­tri­bu­tion this year instead.

What if you’ll be in a high­er tax brack­et in 2014?

If you know that you’ll be pay­ing tax­es at a high­er rate in 2014 (say, for exam­ple, that an out-of-work spouse will be reen­ter­ing the work­force in Jan­u­ary), you might take the oppo­site tack. Con­sid­er whether it makes sense to try to accel­er­ate income into 2013, and to post­pone deductible expens­es until 2014.

 

Factor in the AMT

Make sure that you fac­tor in the alter­na­tive min­i­mum tax (AMT). If you’re sub­ject to AMT, tra­di­tion­al year-end maneu­vers, like defer­ring income and accel­er­at­ing deduc­tions, can have a neg­a­tive effect. That’s because the AMT–essentially a sep­a­rate fed­er­al income tax sys­tem with its own rates and rules–effectively dis­al­lows a num­ber of item­ized deduc­tions. For exam­ple, if you’re sub­ject to the AMT in 2013, pre­pay­ing 2014 state and local tax­es won’t help your 2013 tax sit­u­a­tion, but could hurt your 2014 bot­tom line.

AMT Trig­gers

You’re more like­ly to be sub­ject to the AMT if you claim a large num­ber of per­son­al exemp­tions, deductible med­ical expens­es, state and local tax­es, and mis­cel­la­neous item­ized deduc­tions. Oth­er com­mon trig­gers include home equi­ty loan inter­est when pro­ceeds aren’t used to buy, build, or improve your home, and the exer­cise of incen­tive stock options.

 

Landscape has changed for higher-income individuals

Most indi­vid­u­als will pay fed­er­al income tax­es for 2013 based on the same fed­er­al income tax rate brack­ets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The same goes for the max­i­mum tax rate that gen­er­al­ly applies to long-term cap­i­tal gains and qual­i­fy­ing div­i­dends (for those in the 10% or 15% mar­gin­al income tax brack­ets, a spe­cial 0% rate gen­er­al­ly applies; for those in the 25%, 28%, 33%, and 35% brack­ets, a 15% max­i­mum rate will gen­er­al­ly apply).

Start­ing this year, how­ev­er, a new 39.6% fed­er­al income tax rate applies if your tax­able income exceeds $400,000 ($450,000 if mar­ried fil­ing joint­ly, $225,000 if mar­ried fil­ing sep­a­rate­ly, $425,000 if fil­ing as head of house­hold). If your income cross­es that thresh­old, you’ll also be sub­ject to a new 20% max­i­mum tax rate on long-term cap­i­tal gains and qual­i­fy­ing div­i­dends.

You could see a dif­fer­ence even if your income does­n’t reach that lev­el. That’s because, if your adjust­ed gross income (AGI) is more than $250,000 ($300,000 if mar­ried fil­ing joint­ly, $150,000 if mar­ried fil­ing sep­a­rate­ly, $275,000 if fil­ing as head of house­hold), your per­son­al and depen­den­cy exemp­tions may be phased out this year, and your item­ized deduc­tions may be lim­it­ed.

Two new Medicare tax­es need to be account­ed for this year as well. If your wages exceed $200,000 this year ($250,000 if mar­ried fil­ing joint­ly or $125,000 if mar­ried fil­ing sep­a­rate­ly), the hos­pi­tal insur­ance (HI) por­tion of the pay­roll tax–commonly referred to as the Medicare portion–is increased by 0.9%. Also, a new 3.8% Medicare con­tri­bu­tion tax now gen­er­al­ly applies to some or all of your net invest­ment income if your mod­i­fied adjust­ed gross income exceeds those dol­lar thresh­olds.

 

IRAs and retirement plans a key part of planning

Make sure that you’re tak­ing full advan­tage of tax-advan­taged retire­ment sav­ings vehi­cles. Tra­di­tion­al IRAs (assum­ing that you qual­i­fy to make deductible con­tri­bu­tions) and employ­er-spon­sored retire­ment plans such as 401(k) plans allow you to con­tribute funds pre­tax, reduc­ing your 2013 tax­able income. Con­tri­bu­tions you make to a Roth IRA (assum­ing you meet the income require­ments) or a Roth 401(k) aren’t deductible, so there’s no tax ben­e­fit for 2013, but qual­i­fied Roth dis­tri­b­u­tions are com­plete­ly free from fed­er­al income tax–making these retire­ment sav­ings vehi­cles very appeal­ing. For 2013, you can con­tribute up to $17,500 to a 401(k) plan ($23,000 if you’re age 50 or old­er), and up to $5,500 to a tra­di­tion­al IRA or Roth IRA ($6,500 if age 50 or old­er). The win­dow to make 2013 con­tri­bu­tions to an employ­er plan typ­i­cal­ly clos­es at the end of the year, while you gen­er­al­ly have until the due date of your 2013 fed­er­al income tax return to make 2013 IRA con­tri­bu­tions.

Required min­i­mum dis­tri­b­u­tions

Once you reach age 70½, you’re gen­er­al­ly required to start tak­ing required min­i­mum dis­tri­b­u­tions (RMDs) from tra­di­tion­al IRAs and employ­er-spon­sored retire­ment plans (spe­cial rules apply if you’re still work­ing and par­tic­i­pat­ing in your employ­er’s retire­ment plan). You have to make the required with­drawals by the date required–the end of the year for most individuals–or a 50% penal­ty tax applies. Absent new leg­is­la­tion, 2013 will be the last year that you’ll be able to make qual­i­fied char­i­ta­ble con­tri­bu­tions (QCDs) of up to $100,000 from an IRA direct­ly to a qual­i­fied char­i­ty if you’re 70½ or old­er. Such dis­tri­b­u­tions may be exclud­ed from income and count toward sat­is­fy­ing any RMDs you would oth­er­wise have to receive from your IRA in 2013.

 

Big changes to note

  • Home office deduc­tion rules: Start­ing with the 2013 tax year, those who qual­i­fy to claim a home office deduc­tion can elect to use a new sim­pli­fied cal­cu­la­tion method; under this option­al method, instead of deter­min­ing and allo­cat­ing actu­al expens­es, the square footage of the home office is sim­ply mul­ti­plied by $5. There’s a cap of 300 square feet, so the max­i­mum deduc­tion under this method is $1,500. Not every­one can use the option­al method, and there are some poten­tial dis­ad­van­tages, but for many the new sim­pli­fied cal­cu­la­tion method will be a wel­come alter­na­tive.
  • Same-sex mar­ried cou­ples: Same-sex cou­ples legal­ly mar­ried in juris­dic­tions that rec­og­nize same-sex mar­riage will be treat­ed as mar­ried for all fed­er­al income tax pur­pos­es, even if the cou­ple lives in a state that does not rec­og­nize same-sex mar­riage. If this applies to you, and you’re legal­ly mar­ried on the last day of the year, you’ll gen­er­al­ly have to file your fed­er­al income tax return as a mar­ried couple–either mar­ried fil­ing joint­ly, or mar­ried fil­ing sep­a­rate­ly. This affects only your fed­er­al income tax return–make sure you under­stand your state’s income tax fil­ing require­ments.
  • More health-care reform changes take effect in 2014: Begin­ning in 2014, you’ll gen­er­al­ly be required to have ade­quate health-care cov­er­age or face a penal­ty tax (a num­ber of excep­tions apply). A new pre­mi­um tax cred­it will also be avail­able to qual­i­fy­ing indi­vid­u­als.

 

Expiring provisions

  • A num­ber of key pro­vi­sions are sched­uled to expire at the end of 2013, includ­ing:
  • Increased Inter­nal Rev­enue Code (IRC) Sec­tion 179 expense lim­its and “bonus” depre­ci­a­tion pro­vi­sions end.
  • The increased 100% exclu­sion of cap­i­tal gain from the sale or exchange of qual­i­fied small busi­ness stock (pro­vid­ed cer­tain require­ments, includ­ing a five-year hold­ing peri­od, are met) will not apply to qual­i­fied small busi­ness stock issued and acquired after 2013.
  • The above-the-line deduc­tions for qual­i­fied high­er edu­ca­tion expens­es, and for up to $250 of out-of-pock­et class­room expens­es paid by edu­ca­tion pro­fes­sion­als, will not be avail­able after the 2013 tax year.
  • If you item­ize deduc­tions, 2013 will be the last year you’ll be able to deduct state and local sales tax in lieu of state and local income tax.

 

Talk to a professional

When it comes to year-end tax plan­ning, there’s always a lot to think about. A finan­cial pro­fes­sion­al can help you eval­u­ate your sit­u­a­tion, keep you apprised of any leg­isla­tive changes, and deter­mine if any year-end moves make sense for you.

 

pre­pared by Broad­ridge Investor Com­mu­ni­ca­tions Solu­tions, Inc. Copy­right 2013