12/4/2013 9:30 PM ET|
10 year-end tax moves to make
The year is winding down, but it's not too late to make some money-saving tax moves.
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.
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 401k
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401k 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 401k 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 401k, 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 401k contributions at any time, but double check with your benefits office to be sureof 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 401k 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.
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