NEW YORK (MainStreet) —If your 2012 tax liability was higher than you expected, or your refund was leaner than you had hoped, there is still plenty of time to work towards a more favorable outcome in 2013. Sound planning can help cut down on the rake from the IRS and ensure that you do not leave any credits on the table. Here are a few ways you may be able to reduce your tax liability for 2013.
Also see: Dude, Where's My Refund
Contributing to an IRA or a 401(k) plan will help build a nest egg and reduce an individual’s tax liability. “Be sure you are maximizing your retirement savings opportunities,” said Annette Nellen, a tax professor at San Jose State University. “If possible, invest the maximum amount in your IRA or employer-provided retirement plan.”
The amount of pre-tax earnings an individual can contribute to a 401(k) plan rose from $17,000 for 2012 to $17,500 for 2013. “The dollar amount for contribution limits usually goes up each year,” Nellen said. “Check with your plan administrator to see if you need to do anything to increase your contribution amount.”
Individuals under 50 can contribute up to $5,500 to IRAs for 2013. For the 50 and over population, the maximum is $6,500. In some instances, traditional IRA contributions may be tax-deductible.
Cut and Run
Know when to throw in the towel. Sometimes your best play as the year winds down is to sell a stock that has gone deep into the red. It may not feel good to accept defeat from a morale standpoint, but the decision can help your bank account.
Remember that you can deduct up to $3,000 of net capital losses from your other income. If you have made a series of bad bets, net capital losses in excess of $3,000 can be carried forward to offset future gains and income.
In the event you feel an emotional or sentimental attachment to a losing stock, part ways with it for 30 days and then buy it back. If you repurchase the stock inside of 30 days however, the transaction will result in a wash sale with the loss being disallowed.
Education expenses are often a heavy burden for individuals or families to shoulder. In some cases though, the costs can be used to offset tax liabilities. “Taxpayers with children in college should see if they qualify for many of the higher education benefits,” said Debbie Haines, a tax partner at CST Group, a public accounting firm in Reston, Virg. “The American Opportunity Tax Credit is a higher education tax credit available to married couples with incomes up to $160,000.”
Also see:Tax Credits for Education
The American Taxpayer Relief Act, enacted at the start of this year, extended the credit through the end of 2017. Parents can use it to trim down their tab with Uncle Sam by up to $2,500 per year for each college student for whom they pay qualified tuition expenses.
For wealthier taxpayers, 2013 has brought about new tax challenges. At the beginning of the year, the Medicare tax rate for individuals was increased from 2.9% to 3.8% for earned income in excess of $200,000. Additionally, unearned income above the same threshold is now also subject to the 3.8% tax.
These additional taxes should be considered by small business owners. “Pass-through income from an S corporation may avoid both the Medicare tax on unearned income and the Medicare tax on earned income, if a shareholder is an active participant in the S corporation's trade or business,” said George Ashley, co-founder of Ashley Quinn CPAs and Consultants located in Incline Village, Nev. “There is a possibility that Congress may close this perceived loophole by making the tax treatment for S corporation income similar to partnership and LLC income, where active participants must consider their entire pass-through income as earned income for self-employment tax purposes.”
For individuals involved in real estate, the new tax hikes may not apply if certain criteria are met. “If a taxpayer can meet real estate professional status, the net rental income should not be classified as unearned income for purposes of the Medicare tax,” Ashley said. “In addition, the net rental income should not be classified as earned income, because it is income from rental activities, which is not subject to the earned income Medicare tax.”