April 15 is the target date for taxes, but to ensure that you pay the Internal Revenue Service the least possible amount on that date, you need to make some tax moves before the tax year ends.
The good news this year is that the federal tax laws are in place, unlike at the end of 2012, when Congress was still fighting over legislation.
The bad news is that if you earn a lot of money, you could face some new taxes.
The best news, regardless of your income level, is that you still have time -- until Dec. 31 -- to reduce your tax bill.
Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Following are 10 year-end tax moves to make before New Year's Day.
10 tax moves to make now
- Maximize medical expenses
- Make miscellaneous payment
- Get in the giving mood
- Adjust your withholding
- Do a test tax run
- Assess your assets
- Slip through second-home loophole
- Get help from your main house
- Focus on fuel efficiency
- Examine available extenders
1. Defer your income
The top tax rate is 39.6 percent on taxable income of more than $400,000 for single taxpayers; $450,000 for married couples filing joint returns ($225,000 if filing separately); and $425,000 for head-of-household taxpayers.If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you're self-employed, don't send out invoices for year-end jobs until early 2014.
This strategy works even if you're not in the top tax bracket, but just about to cross into the next higher one.
2. Add to your 401(k)
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you'll have a bit less income that the Internal Revenue Service can touch. (Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth.) Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.
Few of us will reach the maximum $17,500 that employees can stash in a 401(k), but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $5,500.
In most cases, you can modify your 401(k) contributions at any time, but double check with your benefits office to be sure of your plan's rules.
3. Review your FSA amounts
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you don't waste it. You can contribute up to $2,500 to an FSA via paycheck withdrawals. If that limit seems lower, you're right. As part of the Affordable Care Act the maximum contribution amount was set at $2,500; before the health care law change there was no statutory limit.
As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. And though the U.S. Treasury recently announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to take steps to adopt it.
Be sure to check with your employer, and if you must use your FSA money by Dec. 31, make sure you do.
4. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax . This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.
If you do face the 3.8 percent surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.
5. Make the most of your home
Homeownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year's tax bill. Make your January mortgage payment by Dec. 31 and deduct the mortgage interest on your coming tax return. The same is true for early property tax payments.
You also might be able to get some tax savings from upgrades to your primary residence. The residential energy efficient property credit is available for such things as added insulation, new windows and whole house fans .
The maximum credit amount is $500, and you must count any previous years' tax credit claims against that limit. But even if you can only claim $50 or $100, it is a credit, meaning it will reduce your final tax bill by that amount. Just make sure the home improvements are in place by Dec. 31.
6. Bunch your deductible expenses
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.
Medical and dental expenses , for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses , which include business expense claims, must be more than 2 percent of AGI.
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process the better. It's much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.
7. Go shopping
A popular itemized expense is for other taxes you've paid. Most people deduct state and local income taxes on Schedule A. But if you live in a state with no income tax or your income tax rate is low, it will be more advantageous to deduct your state and local sales tax amounts.
The IRS provides tables with the average amount of state sales taxes paid in each state. A worksheet (or program in your computer tax software) also helps you figure any local sales taxes to add to the table amount.
You also can add to the average sales tax amounts any levy on the purchase or lease of a vehicle. This isn't limited to cars; you also can count sales tax on trucks, motorcycles or motor homes, as well as boats and airplanes. Keep your sales receipts, too, for a mobile or prefabricated home purchase or for material used to substantially renovate your residence. Sales taxes on these purchases also are deductible as additions to your state's average sales tax table amount.
8. Be generous to charities
As you're putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles , with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you've held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset's value at the time of gifting. Even better, you don't have to worry about capital gains taxes on the appreciation of your gift.
Older individuals get a special donation option. If you're age 70 one half and don't need the money that the IRS says you must take as a required minimum distribution from your traditional IRA , you can directly transfer that required minimum distribution, or RMD, to a qualified charity. There's no deduction for this trustee-to-trustee transfer, but you'll meet your RMD obligation and won't have to count the distribution as taxable income.
9. Pay college costs early
The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return.
The American Opportunity credit replaced the Hope tax credit in 2009 and is in effect through the 2017 tax year. It's worth up to $2,500 with up to 40 percent of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.
10. Adjust your withholding
Did you write the U.S. Treasury a big check in April? Or did you get a large refund from Uncle Sam instead? Neither is a particularly good financial or tax plan.
Most of us cover our eventual tax bills through payroll withholding. Ideally, you want the amount coming out of your paychecks throughout the year to be as close as possible to your final tax bill. If you have too much withheld, you'll get a refund; too little withheld will mean you'll owe taxes when you file.
You can correct the imbalance by adjusting your payroll withholding now. The correct amount taken out of your final 2013 paychecks will help ensure that you don't over- or underpay the tax collector too much next filing season.
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