ADVICE: Get your year-end tax moves right
By Linda Stern
Taxpayers, check your calendars: There are 41 tax-planning days before the books close on 2013. With new tax provisions in place and several benefits expiring at the end of the year, now is the time to plot your year-end financial strategy.
Here are year-end moves that will make that April tax deadline less painful.
Income and tax rate
First, check your income and your expected marginal tax rate for the year, so you can avoid surprises. If you’re a high earner — or have special income coming this year — that’s especially important because a variety of new taxes kick in this year at various income levels. Single taxpayers earning more than $200,000 and joint filers earning more than $250,000 will have a new 0.9 percent Medicare tax on wages exceeding that amount.
Even higher earners will face higher rates on income and capital gains, as well as limitations on the amount of tax deductions they can take.
Remember that a one-time event like a home sale or a retirement distribution can bump you into a much higher bracket for a year. If you’re approaching these brackets, you can work now to defer income to next year or make strategic decisions about your investments.
Adjust your at-work tax withholding to avoid penalties for low-balling estimated taxes. You may discover that you will owe more in taxes than you thought you would, because of business or investment income. If you didn’t fully account for that by making adequate quarterly estimated tax payments to the Internal Revenue Service, you can face penalties in April.
Overcompensate now, suggests TurboTax’s Bob Meighan, who calls it a “favorite” year-end strategy. He tells taxpayers to arrange to have extra money withheld from now until the end of the year so they don’t face penalties in April for sending in too little in quarterly estimated taxes.
Give away stock
Give away shares of stock. If you own investments outside of a tax-deferred retirement plan, you’ve had a very good year — the Standard & Poor’s 500 stock index is up more than 25 percent for the year. Sell your shares and you’ll have to pay sizeable taxes of as much as 20 percent on your gains. But give away your shares and there are benefits to spare. If you make your year-end charitable donation in the form of a gift of appreciated shares, neither you nor the receiving charity will have to pay taxes on those gains.
You can also give shares away to your adult children and possibly avoid gains taxes. Here are the rules: If your child is over 18 and not a student, or a full-time student age 24 or older, they are considered independent of you for tax purposes. If your child earns less than $36,250 as a single and $72,500 as a couple filing jointly, they are in a zero percent capital gains tax bracket for 2013. That means you can give them your shares, they can sell them, reap the gains, and owe no taxes on that income, says Meighan. That’s a super way to help out a graduate student or young person just starting on their career. (Gift tax rules kick in once you hand over more than $14,000 per person.)
Front load your commuter benefits. For 2013, you can have your employer tuck away as much as $245 per month in pre-tax money to cover your commuting costs for public transportation. For 2014, that will revert to $130 a month. It’s possible Congress will come in retroactively and change that for 2014, but there are no guarantees. So? Max out your bus fare card for December, if there is still time.
Home short sale
Finish your short sale. If you’re trying to complete the short sale of a home that is worth less than you owe on it, do as much as you can to push your lender and your buyer to complete the whole transaction before the end of the year. Any interest they forgive will be taxable in 2014, tax-free if they do it before the end of the year.
Make that big purchase
If you live in a state with no income tax, consider buying that car or boat now. One of the biggest tax breaks scheduled to go away at year-end is the provision that allows taxpayers to deduct their state sales taxes instead of their state property taxes. Folks who live in states that don’t have income taxes can save sizeable amounts by making their big-ticket purchases in 2013.
Check your miscellaneous deductions. Items like work-related expenses and tax-advice fees are only deductible once they exceed 2 percent of your adjusted gross income.
Set up a solo 401(k). If you are self-employed and want to create a 401(k) for yourself and feed it for 2013, you have only until Dec. 31 to do that. You have until the day your taxes are due (typically April 15, or Oct. 15, with extensions) to set up and feed other types of retirement accounts.