Our recently cold and snowy weather serves as a reminder that winter is right around the corner and the end of the year will be here before we know it. And, it also means another tax year will have come to a close. With that in mind, I would like to share some year-end tax planning tips that should be considered to help minimize your tax burden for 2013.
A great way to reduce your tax bill is to defer income to 2014, especially if you know your tax rate will be lower or stay the same the following year. For example ask to have your year-end bonus paid in January if this is standard practice for your employer. If you are self-employed, you can defer income by sending your invoices in early January for year-end work. You can also hold off on selling stock to defer paying tax on the gains.
Maximize retirement contributions
You can reduce your anticipated taxable income by increasing the amounts you are contributing to the various retirement savings vehicles available. The annual limit for a defined contribution retirement plan (e.g., a 401(k)) is $17,500, or $23,000 if you are age 50 or older. You may also want to consider making an IRA (traditional or Roth) contribution. The annual limit for IRA contributions is $5,500, or $6,500 if 50 or older. There are certain Adjusted Gross Income (AGI) limitations that may impact your contribution ability. The 2013 limits can be found here. Additionally, 2013 IRA contributions can be made until April 15, 2014.
Prepay certain deductions
If you itemize deductions, prepaying certain deductible expenditures before the end of 2013 can assist in reducing your tax bill. Three examples come to mind:
- Make your January mortgage payment in December to get the extra mortgage interest deduction in 2013.
- Consider accelerating any planned charitable donations into 2013 that you would otherwise make next year.
- Prepay your state and local income and property taxes that are due early next year. This will help increase your itemized deductions. However, keep in mind that this strategy is negated if you anticipate being caught in the claws of Alternative Minimum Tax (AMT). Before taking this step, discuss it with your tax advisor (or us).
Charitable IRA rollover
If you are 70-½ or older, this year may be the last opportunity to take advantage of a special tax provision that will expire December 31, 2013, unless Congress decides to renew the provision. A charitable IRA rollover allows you to make a distribution from your IRA that goes directly to charity. Such a distribution is excluded from your taxable income and counts to fulfill your required minimum distribution. This strategy can also aid in reducing your state income tax liability.
Gifts of appreciated securities
This year we have seen strong performance in the investment markets. Appreciated stocks are an excellent charitable gift to nonprofit organizations because the charity benefits from the full fair market value of the gift. Additionally, the donor avoids paying tax on any gain in asset value, yet gets a tax deduction for the full fair market value.
These are just a few of the year-end reminders that can help reduce your tax liability for 2013. If you have any questions, please don’t hesitate to contact us. Happy Holidays!