15 Tax-Saving Steps to Take Now

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With the end of the year quickly approaching, you are probably focused on finalizing travel plans and squeezing in last-minute holiday shopping. There’s a good chance that the last thing on your mind is tax planning. However, now is the time to consider strategies to reduce your tax burden come next April, especially given the recent tax law changes and the uncertain future of tax reform.  

The 2013 tax year is sure to be tougher on many taxpayers for a variety of reasons, including:

  • Higher marginal income tax rates 
  • Higher capital gains tax rates
  • Restored phaseout of itemized deductions and exemptions
  • New 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains 
  • New 0.9 percent additional Medicare tax on earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly

Year-end tax planning starts with a projection of whether you will be in a higher or lower tax bracket next year. Then, there is one basic income tax question you need to ask: When it comes to outstanding income, deductions and credits, should I pay now or defer?

What does that mean? In general, if you expect your earnings to increase next year, accelerating income received this year will result in greater tax savings and deductions, and tax credits deferred until next year will be more valuable. If you expect your income to go down next year, you should use the opposite approach.

Let's assume your income is going up in 2014. To help you keep more of what you make next year, consider these 15 tax-saving strategies before it's too late. As always, you should consider consulting a qualified financial professional for advice tailored to your particular situation before taking action.


Take your bonus sooner than later. If your employer allows you the choice, bonuses received before January 1 of next year could help you keep more money in your pocket. Use this calculator to estimate your net bonus (after taxes), and for more info on the tax treatment of bonus money (and other employer-provided benefits), click here

Speed up your billing and collections. If you freelance or are self-employed and believe that your income will be much higher next year, accelerating your billing to increase payment collections before the end of the year could save you a lot in taxes.

Redeem U.S. savings bonds, certificates of deposit (CDs) or annuities. Cashing in these investments this year may make sense if you expect your income to be higher next year (first, be sure there are no penalties or surrender charges involved). And if your income is low enough, doing this might also allow you to completely avoid the new 3.8 percent Medicare tax on unearned income.

Avoid the extra Medicare tax. High income earners will pay an extra 0.9 percent in Medicare taxes on earned income above certain thresholds as of 2013. If your earned income is low enough this year and is going up next year, accelerating earned income for this year might eliminate this tax burden entirely.

Sell appreciated assets now. If you expect to be in a higher tax bracket next year, selling appreciated assets (such as stocks, mutual funds, property) that you have held for more than one year before the end of this year may save you significant money in capital gains taxes. Use this calculator to estimate your capital gains tax liability. However, there are exceptions to this rule, so you should consult a qualified financial professional for personalized guidance.

Offset gains with losses. Harvest tax losses by selling depreciated stocks or mutual funds.  Doing so can offset capital gains on appreciated assets and generate a tax loss of up to $3,000 against other income. However, if you are thinking of buying back the same security after you sell it, you need to be aware of the “wash sale” rules

Maximize retirement distributions.  If you are over 70 1/2, you are required to take at least a certain amount out of your traditional IRA(s), known as a required minimum distribution (RMD).  This year, though, you might want to consider taking a larger distribution than just the minimum if you expect your tax bracket to increase next year.


Complete Roth conversions. Converting funds in a traditional IRA to a Roth IRA in a year before your tax bracket is expected to increase can offer significant income tax savings. Plus, you can benefit from tax-free withdrawals and no RMDs later in life with a Roth. Use this calculator to see if a Roth IRA conversion makes sense for you. 

Accelerate loan payments.  In addition to potentially lowering your tax bracket for 2013 by being able to deduct more interest, paying extra towards your mortgage debt can help you maximize the current deduction on mortgage insurance premiums before it expires at the end of this year.

Save itemized deductions for later. If you expect your income to go up in 2014, taking the standard deduction this year and deferring payments on expenses that qualify for itemized deductions to next year (such as charitable contributions) would offer greater tax savings. Click here to learn more about deduction options and use this calculator to help determine which deduction strategy is right for you. 

Put that facelift on hold. For medical expense deductions, the adjusted gross income (AGI) minimum rises to 10 percent in 2013 for those under age 65. Those over age 65 still have an AGI minimum of 7.5 percent.  If you are 64 this year and turning 65 next year, you might want to postpone elective medical procedures until next year to maximize tax savings. (Note:You can only deduct the portion of your medical expenses that exceeds 7.5 or 10 percent.) 

Watch out for AMT. Overlooking the alternative minimum tax can make certain year-end strategies counterproductive. For example, you shouldn't prepay state and local income taxes or property taxes if you might be subject to the AMT because it could save you nothing (and cost you in potential earned interest). A qualified financial professional can help you determine which strategies are most suitable and avoid unpleasant and costly surprises next year. Use this calculator to see if you might be affected by AMT. 

Invest in your business now. Buying supplies for your business before the end of this year could help you take advantage of the generous current Section 179 deductions and 50 percent bonus depreciation. These tax breaks may not last past 2013, or they might be cut back significantly next year.

Increase your withholding. If you have fallen behind on quarterly tax estimates or are not sure you have withheld enough income so far this year, it might be a good idea to increase your withholding on remaining wages to avoid underpayment penalties.

Hold off investing in mutual funds until next year.  Many mutual funds pay accumulated dividends and capital gains in November and December. If you invest in a mutual fund too late this year, you could end up with an unpleasant surprise in the form of a tax bill next year.

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