October 7, 2013
Year-End Tax Planning Ideas for U.S. Individual Taxpayers, Tax Planners, and Tax Preparers
NEW YORK - 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%,” said Jim Van Grevenhof, a senior tax analyst for Thomson Reuters. “However, the Tax Relief Act passed early this year increased the maximum rate for higher-income individuals to 39.6%.
“This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals who file separate returns,” Van Grevenhof added. “Higher-income individuals can also get hit by the new 0.9% Medicare tax and the 3.8% Net Investment Income Tax (NIIT), which can result in a higher-than-advertised federal tax rate for 2013.”
Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. Below, Van Grevenhof offers six tax-saving moves for the end of 2013:
Up-to-date analyses of legislation and regulations, authored by VanGrevenhof and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
1. Make Charitable Gifts of Appreciated Stock. If you have appreciated stock or mutual fund shares that have been held more than a year and you plan to make significant charitable contributions before year-end, you should consider keeping the cash and donating the stock (or mutual fund shares) instead. You will avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual funds because there are no transaction fees involved.)However, if the stock is now worth less than when it was acquired, you may sell the stock, take the loss, and give the cash to a charity. If giving the stock to a charity, the charitable deduction will equal the stock’s current depressed value and no capital loss will be available. However, if you sell the stock at a loss, you have to wait 31 days to buy it back. Otherwise, you will trigger the wash sale rules, which means your loss will not be deductible, but instead will be added to the basis in the new shares.
2. Do Not Lose a Charitable Deduction for Lack of Paperwork. Charitable contributions are only deductible if you have proper documentation. For cash contributions of less than $250, this means you must obtain either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain, by the time the tax return is filed, a charity-provided statement that shows the amount of the deduction and lists any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically states that the individual received no goods or services from the charity.
3. Leverage Standard Deduction by Bunching Deductible Expenditures. If 2013 itemized deductions are likely to be just under, or just over, the standard deduction amount, you might want to consider the strategy of bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2013 standard deduction is $12,200 for married joint filers, $6,100 for single and married filing separate filers, and $8,950 for heads of households.
For instance, you might want to consider moving charitable donations that would normally be made in early 2014 to the end of 2013. If temporarily short on cash, a taxpayer can charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of real estate taxes or state income taxes otherwise due in early 2014. But, watch out for the Alternative Minimum Tax (AMT), as these taxes are not deductible for AMT purposes.
Note: If you expect to pay a higher tax rate next year, you may want to claim the standard deduction this year and bunch itemized deductions into 2014 when they can offset the higher taxed income. This will boost overall tax savings for the two years combined.
4. Make Charitable Donations from Your IRA. IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totalling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called Qualified Charitable Distributions, (QCDs) are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That is okay, because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Be careful though—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it.
5. Employ Your Child. If you are self-employed, you might want to consider employing your child to work in the business. 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. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, could have a great start on retirement savings since the compounded growth of the funds can be significant.
Note: Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college or entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid.
6. Adjust Federal Income Tax Withholding. If you expect to owe income taxes for 2013, you may want to consider bumping up the federal income taxes withheld from paychecks now through the end of the year. When filing the return, it will still be necessary to pay any taxes due less the amount paid in. However, as long as the total tax payments (estimated payments plus withholdings) equal at least 90% of the 2013 liability or, if smaller, 100% of the 2012 liability (110% if 2012 adjusted gross income exceeded $150,000, $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.
Van Grevenhof advises caution with year-end tax planning moves, though - taxpayers should consult a personal tax advisor before applying these or other tax strategies.
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