Holidays and Tax Planning

Thanksgiving is history. Black Friday’s gone. Cyber Monday’s in the books. What’s there to look forward to? The second half of Hanukkah? Christmas? Are you kidding, we’re talking tax planning, people!

That’s right, rather than thinking about ways to spend money, think about ways to save money, especially on taxes. Since there’s about a month left in 2013, you still have a little time to save a few dollars in tax before the ball drops in Times Square.

Net Investment Income Tax – starting with the 2013 tax year, taxpayers with adjusted gross income (AGI) over $200K single/$250K married filing jointly are subject to an additional tax of 3.8% on net investment income above the threshold amounts. This tax applies to income that includes capital gains, interest, dividends, rents, and others. While some of these items may be beyond your control (such as how much dividend is paid on a stock or mutual fund), you may be able to control your AGI, to keep it below the threshold where the 3.8% tax kicks in. One way is if you’re taking retirement plan (IRA etc) distributions. If you’re considering taking more than a minimum distribution, consider whether a higher distribution would put you above the level where the 3.8% tax kicks in.

Personal Exemption Phase-out – this “gem” has been (thankfully) missing from tax returns for the last three years, but has come roaring back for 2013. For AGI over $250K single/$300K joint, the deduction for personal exemptions reduces (phases out), and goes down to zero with AGI of about $372K single/$422K joint. Taxpayers closing in on the phase-out range of AGI should consider if there are ways to push off 2013 income to 2014, to keep personal exemptions intact.

Itemized Deduction Phase-out – similar to the personal exemption phase-out, the reduction of itemized deductions returns in 2013. Common itemized deductions are mortgage interest, real estate tax, charitable contributions, and others. As with the exemption phase-out, when AGI goes above the thresholds, the total allowed itemized deductions begin to reduce. Note that reduced deductions and exemptions have the effect of subjecting more income to tax, which has the effect of increasing your overall net tax rate.

As you may have concluded, the tax and phase-outs I mentioned above are driven by your level of AGI, so it’s important to look at ways to reduce your adjusted gross income. The best way to address this is to look at page 1 of your 2012 tax return, since the page 1 ends at AGI. Consider if there are ways of delaying income, taking losses on investments (which would reduce income/AGI up to $3K), switch investments to tax free municipal bonds/funds, and increasing retirement plan contributions, among other things.

While increasing itemized deductions won’t reduce your AGI, they will still probably net you some tax savings. Making additional charitable contributions could help, as would bunching medical or miscellaneous itemized deductions, both of which are subject to AGI related “floors”.

So while you’re in the middle of a tug of war with that jerk at Walmart over the last Xbox 360 on the shelf, just think about how much more fun it would be to save some money on your taxes!

How are you planning on saving on your taxes this year? Or next? Leave a comment and let me know what you’re thinking. And please forward this article to a friend or family member who might (tax) benefit from it.

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Spring Cleaning…Fall Tax Planning

For those of you who don’t me personally, one of my favorite extra-curricular activities is performing in community theatre. I was just in a show in which I played (of all things) an accountant! In one scene, one of the other characters asks me if it was a slow time for accountants, to which I reply “I’m doing a lot of tax planning for clients these days”. The play takes place in November, so I’m a couple of weeks ahead of that, but now’s the time to start thinking about tax planning, since there’s still plenty of time before year end to consider various things.

Defer income and accelerate deductions-this is a “standard” CPA tax planning mantra. For wage earners, deferring income isn’t something that usually happens (“thanks boss, but you don’t have to pay me this month…wait ‘til January”), but for small business owners with the ability to hold off billing clients, this can effectively push off income (and tax) from this year to next. Prepaying the January mortgage payment in December can increase the amount of mortgage interest deductible this year. If you think that you won’t wind up with an Alternative Minimum Tax (AMT), prepaying your January state tax estimate by Dec 31 could help save some federal tax.

Capital gains and losses-now is a good time to take a look at last year’s tax return, and see if you have a capital loss carryforward to this year. On the outside chance that you have some stocks that are actually up right now, it may be a good time to lock in those gains, if you have loss carryforwards to offset the gains. On the flip side, if you have a bunch of gains from earlier this year, you might want to think of selling some losers off now, to offset the losses against the gains.

Retirement plans-my character in the play talked about “retirement plans, IRAs, 401Ks, pensions” as part of the tax planning for clients, and you should follow my character’s lead! If you can afford to take money out of current cash flow, and put it toward your retirement, do it, and do as much as possible. If you’re in a 28% marginal federal tax bracket, and earn a dollar in taxable interest income, you’ll net seventy two cents in your pocket. If that same dollar is in a retirement plan (any type) you’ll net one hundred cents!

Charitable giving-if you are charitably inclined, and have securities that have appreciated in value, but you don’t want to pay tax on the gain (if you sell), you can give appreciated stock to a recognized charity, and get a deduction for the fair market value of the stock. So not only do you not pay tax on the gain, you get a deduction for the appreciated value!

These are just few things to consider, to help you save a few bucks in taxes by the end of this year. I hope you found this article helpful, and please pass it along to somebody you know who could benefit from the information. As always, if you have any thoughts or personal experiences on this topic, please leave a comment, and let me know if there’s a topic you’d like to see me write about.

Is That Charitable Contribution Deductible?

Like many Americans, you make contributions to charitable organizations out of the goodness of your hearts…and the tax deduction. But is that contribution actually deductible?

This article is an alert to individual taxpayers, but is also a wakeup call to responsible parties of tax exempt organizations. Continuation of your tax exempt status is no longer a given, if you have not fulfilled your reporting requirements.

A few days ago, IRS announced that approximately 275,000 organizations had automatically lost their tax exempt status, because they did not file legally required annual reports for three consecutive years. At the same time, the Service also announced special steps to help organizations apply for reinstatement of their tax exempt status.

In 2007, a filing requirement was imposed on small organizations, where there had been no requirement previously. At the same time, the law allowed IRS to automatically revoke the tax exempt status of any organization that didn’t file the required returns for three consecutive years. Since that time, IRS has made many efforts to inform exempt organizations of these changes, and also gave smaller organizations additional time to file required returns.

All exempt organizations are required to file one type of Form 990 or another. There is the ‘long form’ 990 (Return of Organization Exempt from Income Tax), the ‘short form’ 990-EZ, and the 990-N ‘e-postcard’. For organizations with annual gross receipts of $50,000 or less for 2010, the filing requirement is satisfied by submitting the e-postcard. Not filing at least one of these three returns for the last three years subjects an exempt organization to the automatic revocation of its exempt status. For organizations that have had their exempt status revoked, IRS has procedures for reinstatement that include reduced application fees.

Now back to you, the one making the charitable contribution. Before you take that deduction, check the IRS website, as they have lists of organizations that qualify as public charities, as well as lists of organizations that have had their exempt status revoked. You may only take a deduction for contributions made to qualifying charitable organizations.

If you have any questions about this, please contact me, and please post a comment. And if you have any friends who are involved in small exempt organizations, have them read this article.