With less than two months to go before the end of the year, now is the time for some quick maneuvers so your tax return doesn’t make you sick early next year.
There are major changes this year for individuals with adjustable gross incomes over $200,000 and married couples at over $250,000. And for couples over $450,000 and individuals over $400,000, there’s a higher tax rate: 39.6 percent. Throw in the new 3.8 percent surtax on investments for high earners, and possibly another 0.9 percent change, and the total tax liability can go to 44.3 percent. Further, capital-gains and dividend taxes for high-income people can go to 20 percent.
Being attentive now is especially important if you are affluent. But it pays for everyone to use tax-cutting strategies. Among the easy ones:
• Clean the closets. If you use deductions, a simple one is to clean the closets and give items to charity. Just make sure you get signed paperwork that lists each item and its value.
• Pay for college. If your child or you are in college or technical training, you may be able to get up to a $2,500 American Opportunity Tax Credit. Income cutoffs for the maximum are $160,000 for couples and $80,000 for singles. So if you are within those thresholds and haven’t paid enough for college to qualify for the max this year, pay bills now to boost that credit.
• Use 401(k) plans to cut your income. If you are just above an income cutoff for a juicy credit like the college credit, child tax credit or dependent care credit, don’t let those money-savers get away from you.
An easy way to whittle a good chunk of income is to put more money into a 401(k), 403(b) or other retirement savings plan at work. The maximum you can contribute this year is $17,500 if you are under 50; $23,000 if over 50. But remember: If you have been putting money into a Roth 401(k) at work, that’s not cutting your taxes. For tax cutting, choose regular 401(k) contributions.
• Go to the doctor. One unpleasant surprise for people with a lot of medical bills this year is a change that makes it tougher to claim a deduction. Previously, you could get a deduction when your medical expenses totaled more than 7.5 percent of your adjusted gross income. But now that’s up to 10 percent unless you or your spouse is 65 or older. You might be able to get over the 10 percent threshold by seeking dental care, vision care or medicine now that you might have otherwise delayed. Just realize you can only claim the amount over the hurdle.
• A hodgepodge of fees. Whether you pay a tax preparer or run up expenses for your job that aren’t reimbursed by your employer, you might be able to get a deduction. Items like unreimbursed travel for work, depreciation on a computer, union or professional dues, lawyer fees and others fall within “miscellaneous” deductions. But they have to total at least 2 percent or more of your adjustable gross income.
• Rush a state tax bill. If you have a state income tax bill to pay early in January, you can pay it in 2013 and increase your itemized deduction total for this year. Try to think ahead, however. If you will need the deduction in 2014, you might not want to rush to take it this year. And if you might be subject to the Alternative Minimum Tax this year, you will waste the benefit of paying higher state taxes now.
• Give to charity. Seniors can give directly to charity from their individual retirement account and, depending on the amount, can cut the requirement to take distributions and pay taxes on them. At the end of 2013, this benefit disappears.
For anyone, a good way to give is to donate stocks, bonds, mutual funds or other assets worth a lot more now than when they were bought. For people worried that their holdings have soared too far too fast, giving shares to charity allows a valuable donation, and you don’t have to sell the asset and pay capital-gains taxes.
• Sell losers. If you have capital gains on assets that you sold in 2013, you can cut your tax burden. Sell an asset that’s lost money. Any loss you have on those will offset other gains. And if you have more than a $3,000 loss, you can carry the extra over to offset gains in the future.