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Dorion-Gray: Year-end tax planning can help save money

Published: Thursday, Nov. 7, 2013 5:30 a.m. CDT

You don’t want to pay any more in tax than you have to. 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. 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. 

If you know that you’ll be paying taxes at a higher rate in 2014, consider whether it makes sense to try to accelerate income into 2013, and to postpone deductible expenses until 2014.

• Factor in the Alternative Minimum Tax. If you are 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. 

• The 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 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent) 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 percent or 15 percent marginal income tax brackets, a special 0 percent rate generally applies; for those in the 25 percent, 28 percent, 33 percent, and 35 percent brackets, a 15 percent maximum rate will generally apply).

Starting this year, however, a new 39.6 percent 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 percent 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 percent. Also, a new 3.8 percent 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 are a key part of planning. Make sure you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional 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).

Note that a number of key provisions are scheduled to expire or change at the end of 2013. 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.

If you have questions you would like answered here, send them to paula@doriongray.com or 2602 Route 176, Crystal Lake, IL 60014.  

• Paula Dorion-Gray, CFP, is a registered representative of Securities America Inc., member FINRA/SIPC and president of Dorion-Gray Retirement Planning Inc. 

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