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Year-end tax planning tips for 2013

This year, tax planning affords us a better opportunity to counsel clients than last year at year-end. Last year, at this time, Congress still had not acted on tax legislation and wouldn’t until early 2013. This year there are no wholesale changes expected before January 1, 2014. With the knowledge that some tax law changes may be coming for the 2014 year, the following are some points for individuals and businesses to consider for this year.

Individuals:

Increase your tax withholdings now if either the 0.9% Medicare surtax or the 3.8% Medicare surtax on investment income applies to you. Single taxpayers and head of household taxpayers with earnings over $200,000 and married couples with earnings over $250,000 will pay the 0.9% Medicare surtax. Single taxpayers and head of household taxpayers with adjusted gross incomes over $200,000 and married couples with adjusted gross incomes over $250,000 will pay the 3.8 Medicare surtax on investment income.

The new highest tax rate of 39.6% applies to single filers with taxable income over $400,000 and married taxpayers filing jointly with income over $450,000.

Long term capital gains and qualified dividends are now subject to a maximum tax rate of 20% for those same high income filers. Net capital losses, whether long or short-term, continue to be deductible at $3,000 per year. Before this year is over is the time to your review investment gains and losses to determine whether additional transactions, prior to year-end, may improve your income tax situation.

The phase-out of certain itemized deductions is back for some higher-income taxpayers for 2013. Single taxpayers with adjusted gross income over $250,000, head of households with AGI over $275,000 and married filing jointly with AGI over $300,000 will have itemized deductions reduced by 3% of the amount by which their AGI exceeds these thresholds. Medical expenses, interest expense, casualty and theft losses, and gambling losses are not subject to the limitation.

The 2013 personal exemption amount is now $3,900 per taxpayer. These exemption amounts will be subject to the reinstated phase-out for the same higher income taxpayers as the above mentioned itemized deductions phase-out.

Prepaying state and local taxes may save you some money if you are not subject to the Alternative Minimum Tax (AMT). Prepaying your 4th quarter state and local estimate in December allows for the additional itemized deduction in 2013. The above mentioned phase-out of itemized deductions for higher income taxpayers is back for 2013 and there may be a limit on the deductibility of these taxes and other itemized deductions for higher income taxpayers.

The standard deduction is now worth $6,100 for single filers and $12,200 for married filing joint filers. Married taxpayers over 65 years old receive an additional $1,200 each on their standard deduction or $1,500 if they are unmarried.

Medical related expenses are now only deductible if they exceed 10% of your adjusted gross income. Taxpayers that are over the age of 65 can deduct medical amounts over 7.5% for 2013.

Charitable contributions paid by credit card in 2013 will be deductible this year, even if the bill isn’t paid until 2014.

Maximize your retirement contributions to employer 401(K)/403(b)/457 retirement plan or IRAs to reduce your taxable income. Contribution limits for 401(K)/403(b)/457 plans for 2013 increased slightly to $17,500 for those under 50 years of age and to $23,000 for those over 50 years of age. IRA limits also increased by $500 to $5,500 for those under 50 years and $6,500 for those over 50 years. IRA contributions for 2013 must be made by April 15, 2014 and the deadline for contributions to all employer retirement plans is December 31.

Take your Required Minimum Distribution (RMD) from your IRAs before year-end. Penalties can be steep, as much as 50% of the RMD, for taxpayers over 70 ½ years old who neglect to take required their minimum distributions from IRAs. The RMD may be from any account, but the cumulative RMD value from all the IRA accounts needs to be taken by year-end.

Qualified Charitable Distributions (QCD) from an IRA are not counted as taxable income and can be used to satisfy your IRA required minimum distribution for the year. A QCD is an otherwise taxable distribution from an IRA owned by an individual, who is age 70½ or over, that is paid directly from the IRA to a qualified charity. Up to $100,000 of a QCD made for the year can be excluded from gross income by an IRA owner, and a QCD can be used to satisfy any IRA required minimum distribution (RMD) for the year. FYI--the amount of the QCD excluded from gross income cannot be taken as a deduction for charitable contributions. The current QCD tax provision expires at the end of the 2013 tax year.

Flex plan “use-it-or- lose-it” rules have been eased by the IRS. Plans can now allow employees to carry-over $500 into the following year, without forfeiting the monies. Plans allowing until March 15 as a spending grace period are not eligible for the new rule unless they amend their plan by the 2013 year-end and drop the 2 ½ month extension.

The American Opportunity Tax Credit (AOTC) for post-secondary tuition has been extended for 5 years, through 2017. A credit of up to $2,500 may be claimed during the first 4 years of college. The credit phases out with AGI above $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly.

Teachers should take advantage of the $250 above the adjusted gross income line deduction for out of pocket classroom supplies before year end. The deduction was only extended through 2013.

Refunds for early filers will be delayed because the IRS is opening the filing season up to two weeks later than usual. The government shutdown occurred during the testing process for the IRS’s tax return acceptance systems which caused this delay.

Annual gifts up to $14,000 per person may be made for 2013 without tax consequences or the filing of a gift tax return or affecting your overall estate exemption.

Estates & trusts are now subject to the new 3.8% investment tax on any undistributed income over $11,650. The trust or estate fiduciary should adjust the 2013 income tax estimates accordingly if this new tax applies to the entity.

Businesses:

Purchase new business property before the end of 2013. The maximum Section 179 deduction allowed for qualified business property placed in service in 2013 is $500,000. The allowed amount is reduced to $25,000 for the tax year 2014. Additionally, the current 50% bonus depreciation tax break for qualified property is set to expire at the end of 2013. To qualify for this bonus depreciation, equipment must be new and placed in service by year-end. We recommend that you plan to accelerate all purchases of machinery and equipment by December 31, 2013 to take advantage of these benefits.

The mileage reimbursement rates for business auto use is currently 56.5 cents per mile. Rates for 2014 are not yet available for publication.

Prepaying or deferring payment of business expenses, whichever affords the best tax-savings, is a strategy available to some cash-basis businesses. In addition, using a credit card, if cash flow is tight, will provide the tax deduction when the charge is actually made.

We also recommend setting up a small business retirement savings plan, if not already in place. The current tax law offers a $500-per-year tax credit, for the first 3 years of a new SEP, SIMPLE or other retirement plan to cover initial setup expenses for certain small employers.

You should consider nailing down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won’t be available for workers hired after this year.

Consider making qualified research expenses before the end of 2013 to possibly be able to claim a research and development tax credit, which won’t be available for post-2013 expenditures unless Congress extends the credit. FYI, this tax credit provision has always been temporary and needs to be passed again in late 2013 or early 2014 to be extended again.

The current 2013 year may be the last year for the Domestic Production Activities Deduction for your business if you are a manufacturer, producer, processor etc. Please contact us for additional information considering how this calculation or deduction applies to you.

Make a careful review of your older accounts receivable balances to see if a write-off is needed by December 31, 2013 for certain customer’s accounts that may be considered uncollectable by year end. This only applies to accrual basis taxpayers.

These are just some of the year-end steps that can be taken to save on your tax liability. Please contact us with any questions or ask how we can tailor a particular plan that will work best for you.

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9/15/2017
Corporations: File 2016 form 1120 and 1120S if extended
Corporations: File third quarter estimated tax
Partnerships: File 2016 form 1065 or 1065-B if extended
Individuals: File third quarter estimated tax
Individuals: City third quarter estimated payment due


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