For most individuals, the federal income tax rates for 2013 will be the same as last year. However, the Taxpayer Relief Act, passed early this year, increased the maximum rates for higher-income individuals to 39.6% (up from 35%) on ordinary income and 20% (up from 15%) on capital gains and dividends. These increases will hit married filing joint (MFJ) couples with taxable income above $450,000 ($400,000 for singles). In addition, the new 0.9% Medicare tax and 3.8% net investment income tax potentially kick in when modified adjusted gross income (or earned income in the case of the Medicare tax) goes over $250,000 for MFJ couples ($200,000 for unmarried). For clients impacted by these increases, year-end planning is all that much more important this year.
Here are five year-end strategies to consider:
- Leverage Standard Deduction by Bunching Deductible Expenditures. The 2013 standard deduction is $12,200 for MFJ ($6,100 for single). If your 2013 itemized deductions are likely to be just under, or over, these amounts, consider bunching together itemized deductions every other year, while claiming the standard deduction in the intervening years. For instance, charitable donations normally made in early 2014 could be moved to the end of 2013. If temporarily short on cash, you can charge the contribution to a credit card – it is deductible in the year charged. You may also be able to accelerate payments of real estate or state income taxes otherwise due in early 2014. But, watch out – these taxes are not deductible for AMT purposes.
- Make Charitable Gifts of Appreciated Stock. Charitably-minded individuals should consider keeping their cash and donating appreciated stock instead. You won’t pay tax on the appreciation, but will still be able to deduct the donated stock’s full value. If it’s desirable to maintain a position in the donated stock, a like number of shares can be bought back immediately. However, if stock is now worth less than when it was acquired, then sell the stock, take the loss, and give the cash to a charity. If the depressed stock is given to the charity, the current lower value will be the charitable deduction and no capital loss will be available. For stock sold at a loss, the wash sale rules apply so you’ll have to wait 31 days to buy it back.
- Make a Charitable Distribution from an IRA. If you are age 70 ½ or older you can transfer up to $100,000 of otherwise taxable IRA money to a charity. Such a transfer is federal income-tax free, but no charitable deduction is allowed. However, the tax-free treatment equates to a 100% write-off, and you don’t have to itemize deductions to get it. Be careful – to qualify for this special tax break, the funds must be transferred directly from the IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So this could be your last chance.
- Purchase Business Property. Clients who own a business and have plans to buy a business computer, software, or equipment, should consider doing so before year-end to take advantage of the temporarily increased Section 179 deduction and the temporary 50% bonus depreciation. For 2013, the maximum Section 179 deduction is $500,000. This means a business can often claim first-year write-offs for the entire cost of new and used equipment and software additions. In addition to the bumped-up Section 179 deduction, you can also claim first-year bonus depreciation equal to 50% of the cost (reduced by the Section 179 deduction claimed) of most new (not used) equipment and software placed in service during 2013. Unless Congress takes further action, the Section 179 deduction will drop to about $25,000 in 2014 and the 50% first-year bonus depreciation break will expire at year-end.
- Adjust Federal Income Tax Withholding. Are you going to owe taxes for 2013? If so, consider bumping up the federal income taxes withheld from you paychecks now through the end of the year. 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 AGI exceeded $150,000, $75,000 for MFS), penalties will be minimized, if not eliminated.