Year-End Moves for Individuals
- It may be advantageous to defer your year-end bonus until next year.
- Bunching your itemized deduction, such as real estate taxes may save you taxes this year.
- Look for losses in your stock portfolio and consider selling them before year end to offset your 2013 capital gains. Keep in mind the wash sale rules!
- Increase your withholdings if you're facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.
- Taking required minimum distributions (RMD) from your employer sponsored retirement plan if you have reached age 70 ½ to avoid a penalty.
- Make annual exclusion gifts before year-end to save gift tax. You can give $14,000 tax free in 2013 to an unlimited number of people.
- Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- If you're eligible to make health savings account (HSA) contributions in December of 2013, then you can make a full year's worth of deductible HSA contributions for 2014.
- Convert traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind that such a conversion will increase your adjusted gross income for 2013.
- Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes.
- If you're self-employed and haven't done so yet, set up a self-employed retirement plan.
- If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
NEW Individual Issues to Consider for 2013
For the first time, taxpayers have to take into account the following new provisions: The new 3.8% tax surtax on unearned income and the additional 0.9% Medicare tax.
The new 3.8% surtax is applied to the lesser of: (1) net investment income, or (2) the excess of modified adjusted gross income over certain thresholds. These thresholds are $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing separate, and $200,000 in any other case. Because this is the "lesser of" rather than the "greater of," taxpayers with MAGI under the threshold, will NOT be subject to the 3.8% surtax. The easiest way to avoid this tax would be for taxpayers to reduce their modified adjusted gross income below the stated threshold by deferring income and accelerating deductions. Other taxpayers should consider ways to minimize their net investment income by deferring interest income, dividends, and rents/royalties, as well as, reducing passive activity income for the year.
The additional 0.9% Medicare tax may require year-end actions for employees and self-employed persons. Employers are required to withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status. However, unique situations may require taxpayers to review their withholdings at year end to avoid underpayment of tax. For example, an individual earns $150,000 from two separate employers during the year. He is subject to the additional Medicare tax, but neither employer would have withheld the tax since wages from each employer did not exceed $200,000