2013 2014 tax planning for individuals


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2013 2014 tax planning for individuals

  1. 1. 2013 4th Quarter Tax Planning Tips for Individuals www.nexus-financial.com
  2. 2. Introduction • Contrary to popular belief, tax planning is really a simple task that should be undertaken each year. Begin with anticipating your gross income for the year as well as allowable deductions to determine your tax bracket and income thresholds that will either limit your ability to take advantage of deductions and/or credits, or trigger higher and/or additional taxes. Once you can estimate what your income taxes will look like, you can then evaluate which strategies will serve you best when its time to file your taxes. Outlined in this presentation are actions you can take to minimize tax liability. 2
  3. 3. 4th Quarter Tax Planning Tips • • • • Know your tax rate. Although 2013 ordinary federal income tax rates will stay the same, higher income individuals’ tax brackets have increased from 35% to 39.6%. (The high-income individual tax rate is higher than the corporate tax rate of 35%.) Leverage itemized deductions. Alternate year-to-year between taking the standard deduction with “bunching” miscellaneous itemized deductible expenditures, medical expenses and other itemized deductions. Defer income. If you expect to be in the same or lower tax bracket in 2014, it is wise to defer as much income as possible to next year. • Ask your employer to defer a bonus that may be coming your way until 2014. Time investment gains and losses. Selling appreciated securities before year end may be a smart tax strategy. • Long-term capital gains are taxed at 0% for taxpayers in the 15% tax bracket. Capital losses can be used to offset capital gains and reduce other income up to $3,000. 3
  4. 4. • Take advantage of tax breaks. For those age 70 ½ make taxfree charitable contributions from your required IRA distributions. Special rules apply. • Use it or lose it. “Spend down” flexible spending accounts before the balances expire. Contribution limits capped at $2,500 this year. • Calculate and estimate carefully. Increase the amount you set aside next year in your employer’s health flexible spending account if you set aside too little this year. • Adjust elective deferral plans at work. Maximum deferral for 2013 is $17,500. This increases to $23,000 for taxpayers age 50 and over. • New taxes in effect. Effective for the first time in 2013 are a 3.8% Medicare Investment Tax, a surtax on net investment income and the 0.9% Medicare Health Insurance Tax, a payroll tax on wages and self employment income. These taxes affect high-income taxpayers. 4
  5. 5. • Maximize tax credits, deductions and exclusions which will sunset unless extended by an act of Congress. Among these are: • Make energy-saving improvements to your home or purchase energy-efficient appliances; • Above-the-line deduction for $250 unreimbursed, out-ofpocket expenses of grades K-12 teachers, instructors, counselors, principals and aides; • Choice between general sales tax deduction or deduction for state and local income tax deduction; • Above-the-line qualified higher education tuition and fees deduction; • Deduction for mortgage insurance premiums as qualified home mortgage interest if AGI is not more than $109,000; and • Cancellation of principal residence debt can be excluded from gross income this year if discharged because of change in financial condition or decline in value of residence. 5
  6. 6. • Note the new rules. • Rules for home office deductions have changed allowing for a more simplified option for a maximum standard $1,500 deduction. • Depreciation rules have changed resulting in many refundable credits disappearing. • Prepay expenses. Consider using a credit card to prepay expenses that can generate deductions for this year. • Increase withholding. If you expect to owe state and local income taxes, consider asking your employer to increase withholding of state and local taxes before year-end to pull the deduction of those taxes into 2013. • Accelerate purchases. Make big ticket purchases before year end in order to assure a deduction for sales taxes on the purchases if you elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. This choice won’t be available after 2013. 6
  7. 7. • Familiarize yourself the Affordable Care Act. This new legislation may have an impact on your tax status and liability in 2014. Among other things, • The Act raises the income threshold this year to 10% of AGI for taxpayers 65 and under. You may need to defer medical bills to lump expenses in a single year to get the deduction. • Mandate and requirement to have coverage or pay a penalty. • Greater of $695 per year up to a maximum of $2,085 per family or 2.5% of household income • Phase in: $95 in 2014, $325 in 2015 and $695 in 2016 for the flat fee of 1% of taxable income in 2014, 2% of taxable income in 2015, and 2.5% of taxable income in 2016 7
  8. 8. Other Provisions • The tax credit for new energy-efficient homes is set to expire • The monthly exclusion for transit passes and vanpooling will change • New capital gains and qualified dividends rate took effect in 2013. • Maximum rate on long-term gains increased from 15% to 20% and now also applies to dividends. • Same-sex couples who are legally married will be recognized by the federal government • Able to file joint federal tax return this tax season • Able to file amended returns for previous tax years 8
  9. 9. Standard Deduction Increase • For taxable years beginning in 2013, the standard deduction amounts, adjusted for inflation, are as follows: Filing Status Standard Deduction Married Filing Jointly and Surviving Spouses $12,200 Head of Household $8,950 Single $6,100 Married Filing Separately $6,100 Aged or blind – (additional $1,200 deduction) Aged or blind, unmarried and not a surviving spouse – (additional deduction) $1,500 9
  10. 10. Current Tax Rate Table Taxable Income Tax Rate [Bracket] Married Filing Jointly Head of Household Ordinary Income Short-term Capital Gain Long-term Capital Gain Qualified Dividend NIIT Tax* $0-17,850 $0-12,750 10% 10% 0% 0% 0% 8,926-36,250 17,851-72,500 12,751-48,600 15% 15% 0% 0% 0% 36,251-87,850 72,501-146,400 48,601-125,450 25% 25% 15% 15% 0% 87,851-183,250 146,401-223,050 125,451-203,150 28% 28% 15% 15% 0% 183,251-398,350 223,051-398,350 203,151-398,350 33% 33% 15% 15% 3.8% 398,351-400,000 398,351-450,000 398,351-425,000 35% 35% 15% 15% 3.8% 450,001-up 425,001-up 39.6% 39.6% 20% 20% 3.8% Single $0-8,925 400,001-up 3.8% of the lesser of net investment income or adjusted gross income in excess of $250,000 for MFJ ($200,000 for single or head of household). * 10
  11. 11. Be Prepared • The 16-day government shutdown has contributed to a late start to this tax filing season. The IRS expects to begin processing returns no earlier than January 28 and no later than February 4. 11