How can it be December already?! This year is just flying by. In fact there are only 27 days left in 2013.
There are a lot of things I need to do before the end of the year. Not only do I need to buy gifts for my friends and family to celebrate Christmas, but I also need to do a bit of tax planning.
I know it seems too early to worry about taxes because they aren’t due till April, but there are a few things I want to do so I can reduce the amount of money I owe. Specifically there are six tax moves I want to make before the end of the year. These are strategies that anyone can use to reduce their upcoming tax bill or receive a bigger refund, including you.
Read on to find out 6 easy ways you too can do to lower your upcoming tax bill.
Strategy 1: Prepay Deductible Expenditures
Prepaying a few of next year’s expenditures that are deductible on your taxes is a great way to reduce what you owe. You have to itemize your deductions in order to be able to write-off these expenditures, but they are well worth the extra time it takes to do so.
Popular deductible expenditures to prepay include making an extra mortgage payment, property taxes, state and local taxes, and medical expenses. If you can swing a prepayment of any or all of these expenditures your itemized deductions will be that much higher, offsetting anything you might owe in taxes.
The only time it does not make sense to prepay these expenditures is if you are on the cusp of being in a higher tax bracket. If you are teetering on the edge of being bumped up to the next tax bracket and believe you might make more money next year then do not prepay any of these expenses. You’ll want to save these deductions for 2014 so you will have more write-offs that will hopefully be enough to keep you in the lower tax bracket.
Strategy 2: Reduce Your Income
Reducing what you owe is all about lowering your income. You can do this (and still keep the income for yourself) by contributing to a 401(k), traditional IRA, Simplified Employee Pension plan (SEP) or other type of qualified retirement savings plan.
For 2013 you can contribute up to $17,500 if you’re under age 50 ($23,000 if you’re older than 50) to your 401(K) plan (that’s $500 more than you were allowed to contribute in 2012). If you have a traditional IRA you can contribute up to $5,500 if you’re 50 or younger. If you’re over 50 you can contribute as much as $6,500. Self-employed individuals with a SEP can contribute up to $51,000 or 20% of their adjusted income for 2013.
Strategy 3: Time Investment Gains and Losses for Tax Savings
For most of us our investments have done quite well this year. We’re sitting pretty and thinking about capturing some of our gains. This is a good thing, but without proper planning we could be looking at a rather large tax bill.
Some taxpayers, those who are in higher tax brackets, may be especially exposed if they sell off any of their appreciated investments. For 2013 the tax rate on capital gains and qualified dividends increased to 20% (it was 15% in 2012) for those of us in the 39.6% marginal tax bracket. That plus the new 3.8% Medicare surtax on net investment income could cause some taxpayers to be hit with a 23.8% tax if they sell any of their appreciated securities. Yikes!
If you are one of the many taxpayers considering selling an investment for a net profit, you might want to also consider selling some of your securities that have lost value to help reduce the capital gains elsewhere in your portfolio. The resulting capital losses will offset the gains you made. You can use the losses to offset up to $3,000 of ordinary income or you can carry them into next year to offset future capital gains and ordinary income.
Strategy 4: Give to Charity
Donating to your favorite charity is not only a nice thing to do but it’s also tax deductible! Write a check or donate assets before the end of the year and you can deduct the fair market value from your 2013 tax bill.
Take advantage of the tax loophole that allows you to donate highly appreciated securities like stocks that you have owned for at least a year without having to pay capital gains tax and still lets you write off the value! It’s 100% legal and IRS approved if you donate stocks that have appreciated to a charity directly, rather than sell them and then donate the cash to charity and it will reduce your tax bill in the process.
You see if you sell stocks that have gone up in value you have to pay capital gains tax on the appreciation. But if you were planning on donating to charity and selling some stock this year, then the best tax move for you is to donate the assets directly to the charity. This will stop you from having to pay capital gains and allow you to deduct the fair market value of the assets from your income, all while helping out your favorite charity. It’s a win-win!
Another tax loophole to take advantage of when donating is the provision that allows IRA owners to make a tax-free distribution to a qualified charity. If you are 70 ½ or older you can make up to $100,000 in cash donations. This is a smart tax move for two reasons: its tax free, you won’t be taxed on the amount. And two, the distribution counts as a retiree’s minimum required distribution for the year.
Strategy 5: Take Advantage of Special 2013 Deductions
While some of these special deductions don’t apply to my family specifically, I thought they might apply to you. These deductions are legal only for this tax year, unless Congress extends them, so take advantage of them before they go away forever.
If you are planning on making a big purchase soon, possibly for a car, boat, home or other high ticket item, you might want to make it before the end of the year. That’s because you can take the state sales tax deduction in lieu of taking the state income deduction. This is most popular for people living in states with low or no state income tax (like me, a Florida resident). Most people who choose the sales tax option will use an IRS-provided table to calculate their allowable sales tax deduction. However, if you’ve kept all your receipts from purchases you made this year, you can use your actual sales tax amounts if it’s higher.
Furthermore, if you were one of the many homeowners who were caught up in the foreclosure crisis this year the government will forgive part if not all of your debt. Homeowners of foreclosed homes are allowed to exclude up to $1 million if you’re single and $2 million for couples in debt that was forgiven on their principal residence.
If you or someone you know is a teacher tell them to take advantage of the educator’s expense deduction for the last time. This provision allows qualified teachers to deduct up to $250 in unreimbursed expenses for books, supplies, and other materials used in classrooms.
Did you make any energy-saving improvements to your house this year? If so you can deduct a portion of the expense on your taxes possibly for the last time. Solar panels, energy efficient appliances and windows are all on the approved list of home improvements you can claim a tax credit of 10% of the cost for on your taxes. The only caveat is it has to be on your principal residence.
Strategy 6: Use up Your Annual Gift Tax Exemption
You can reduce your taxes and help out your children or other family members at the same time. The IRS allows you to give up to $14,000 a year to as many people as you choose ($28,000 if both you and your spouse give money to a person) without paying taxes on the money. You can give cash, stocks, bonds or portions of real estate as a tax-free gift. This is a good idea for high net worth individuals because estates worth over $5.25 million will be taxed at extremely high rates. And who gets stuck with the tax bill? Your heirs.
Don’t let the end of the year come without making one or more of these financially savvy tax moves. Any one of these can reduce the amount you owe on your taxes which are due in just over four months! Don’t wait until it’s too late!
Keeping Money in Your Pocket,