Year-End Tax Planning 2013
NEW YORK ( MainStreet) While the average taxpayer tends to avoid thinking about taxes until the approaching April 15 deadline forces him to, once the ball drops in Times Square at midnight on December 31 and the New Year is rung in, there is very little that can be done to cut your 2013 tax bill.
But during the last two months of the year you can do a great deal to reduce your liability.
Sit down with paper and pencil, and list your taxable income and allowable deductions to date. Using your 2012 return as a guide, prepare a projected 2013 tax return. From this beginning, you can decide what steps to take to make sure you pay the absolute least amount of federal, state and local income tax for 2013.
Before I begin let me point out some important items that you should keep in mind -
- There are no year-end tax planning strategies that apply to all taxpayers in all cases. Year-end actions must be evaluated in the context of the facts and circumstances of your individual situation.
- You must consider the state and local tax consequences of your year-end actions. And also beware of the Alternative Minimum Tax (AMT). While a year-end strategy may reduce your "regular" federal income tax for 2011, it may end up costing you additional state income taxes or make you fall victim to AMT.
- Your first criteria for evaluating any financial transaction you are considering should always be economic. Tax considerations should come second.
- Be sure to review your year-end situation with your tax professional before taking any actions.
THE GENERAL RULE
Traditional year-end planning calls for postponing the receipt of taxable income until 2014 and accelerating allowable deductions to be claimed in 2013. This strategy will generally apply if you expect to be in the same tax bracket for both 2013 and 2014, or if you expect to be in a lower bracket in 2014.
If you anticipate a substantial jump in income in 2014, which may push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income for 2013 and postpone deductible expenses until next year. Income will be taxed at a lower rate in 2013, and deductions claimed in 2014 will yield a greater tax savings.
Unfortunately we can only guess at what the Tax Code will look like for 2014. We do know that several temporary tax benefits are scheduled expire on December 31, 2013. There has been talk of Congress addressing tax reform before year-end, and in the process taking away or limiting tax deductions and credits and lowering rates. But Congress has not been able to accomplish anything lately, so the deductions, credits and rates for 2014 are up in the air.