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Year-End Checklist for Tax Breaks

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It’s not too late to take actions now that can result in income tax breaks for 2013. Here are some actions to consider taking by December 31…

  • Home energy improvements. Certain home energy improvements may qualify for tax credits. There are no income limits to qualify for these credits. Insulation, storm window, energy-efficient heating and air-conditioning systems and certain other items qualify. The top credit overall for 2013 is $500, but there are specific dollar limits on some items, such as windows, which are limited to a $200 credit. The overall dollar limit must be reduced by any credits claimed in previous years. For details, click here.
  • Charitable contributions. Donate cash and/or property (including used clothing and household items). Donations are deductible if you itemize and have the necessary records to prove that you made the donations, such as a written acknowledgment for a donation of $250 or more and a qualified appraisal for property donations (other than publicly traded securities) over $5,000. If you are considered to have “high income” (the amount of income you need for this designation depends on your filing status), you may lose some of the tax benefit from deductions because of the phaseout of itemized deductions for 2013.
  • IRA transfers to charity. Consider making a direct transfer of up to $100,000 from your IRA to a public charity if you are 70½ or older. The transfer—including any portion that satisfies your annual required minimum distribution (RMD)—is tax-free. This move lowers your adjusted gross income (AGI), which can reduce the portion of Social Security benefits included in income and make you eligible for more tax breaks. Even if you used this strategy under a special rule for January 2013 that let you apply the transfer for 2012, you still are eligible to make another transfer by December 31 for 2013.
  • FSA spending. Use up your pretax health-care flexible spending account (FSA) contributions for 2013 by spending on reimbursable medical items (including itemized medical expenses and over-the-counter medications prescribed by a doctor) or procedures not covered by insurance. If you are having trouble spending the entire amount, many employers now allow you to carry at least part of the balance into the new year—either $500 that you can carry up to the end of 2014 or an unlimited amount that you can delay spending for two-and-a-half months into the new year. Check with your employer.
  • Paying local taxes early. You can get a federal tax break for prepaying your state and local property taxes and income taxes that would otherwise be paid in 2014 as long as you itemize deductions. You even may receive a discount from your municipality on prepaid property taxes. However, don’t prepay taxes if you expect to be subject to the alternative minimum tax (AMT) because no deduction for taxes is allowed for the AMT.
  • Harvesting investment losses. Review your investment portfolio and sell investments for optimum tax results this year. For example, consider selling some of your stocks, bonds and mutual fund shares that have lost value to offset your realized capital gains. Up to $3,000 of losses in excess of gains can be deducted from ordinary income. Any additional losses can be carried forward to future years. Another wrinkle this year: Minimizing investment income can reduce or avoid the 3.8% additional Medicare surtax on net investment income for “high-income” filers (whether you’re in this category depends on your modified adjusted gross income and your filing status). Of course, selling should be dictated by investment considerations, with taxes being only one factor in your decision. For more information on the surtax, click here.
  • Converting your traditional IRA to a Roth IRA . This doesn’t save taxes for the year—it costs you—but it will create tax-free income for the future. While 2013 contributions to the account can be made until April 15, 2014, the conversion for 2013 must be completed before the end of this year. There’s no dollar limit on how much you can convert. The decision depends in part on whether you are willing and able to pay the taxes that result from the conversion and the impact that the amount converted—which counts as income—has on your overall tax bill for 2013. Too much extra income can push you into a higher tax bracket.
  • Deferring a year-end bonus if your employer allows it. This will minimize your income for the current year. By keeping your income down through deferral, it may entitle you to claim other tax breaks that higher income may have prevented. However, if your taxable compensation is high enough, you’ll still owe the 0.9% additional Medicare tax (depending on your other income and filing status), which is a new tax starting in 2013 on wages of high earners above certain thresholds. For additional information on this tax, click here.
  • Bunching certain deductible items if your total itemized deductions are about the level of the standard deduction for your filing status ($12,200 for joint filers and $6,100 for singles). Bunching means paying for deductible items in 2013 that you would otherwise pay for in 2014 so that you can itemize this year and then take the standard deduction next year—or flipping this strategy (delaying the deductible expenses) to take the standard deduction this year and itemize in 2014. The same strategy used for all itemized deductions in order to claim the standard deduction can be applied to specific itemized deductions that have an adjusted gross income (AGI) floor. This includes medical expenses and miscellaneous itemized deductions, which have their own yearly AGI thresholds (10% of AGI for medical expenses or 7.5% for those 65 and older…and 2% of AGI for miscellaneous itemized deductions).
  • Funding 529 college savings plans for your children or grandchildren to save for their higher education. While you don’t get any federal tax deduction, you may qualify for a state tax break.
  • Prepaying your child’s college tuition. As long as the semester starts in January, February or March of 2014, you can take the tuition into account when figuring an American Opportunity Tax Credit for 2013. Watch income limits on eligibility for this credit.
  • Giving appreciated securities to a parent you are supporting. Your parent can sell them to generate needed income. If your parent is in the 10% or 15% tax bracket, he/she will pay zero tax on any long-term capital gains from the sale of these securities, leaving more after-tax income in the family.
  • Adjusting the income tax withholding from your salary or wages. If you estimate that your withholding from pay won’t cover the taxes you’ll owe when you file your 2013 return, ask your employer to increase withholding between now and the end of the year to make up the shortfall. For example, use this strategy if you are a “high-income taxpayer” who may be subject to the new 3.8% additional Medicare tax on net investment income (the same income thresholds for determining high income for the additional Medicare tax on earned income also applies for this purpose).

Important: If you are unsure about whether any of the above actions can benefit you or what other favorable steps you can take before the end of the year, discuss them with your tax adviser now.

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Source: Barbara Weltman, Esq. is an attorney based in Vero Beach, Florida, and author of J.K. Lasser’s 1001 Deductions & Tax Breaks (Wiley). www.BarbaraWeltman.com Date: December 15, 2013 Publication: Bottom Line Personal
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