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Posted: December 23, 2013

Six easy tax-saving tips

Do these before April 15

Wayne Farlow

While tax rates for the average taxpayer are not significantly higher in 2013, individuals with income above $200,000 and couples with income above $250,000 could see their taxes significantly increased over 2012 taxes.  Regardless of your tax bracket, here are six actions to take, between now and April 15, that may significantly reduce your 2013 tax bill.  

1. Charitable Contributions. If you are planning year-end charitable contributions, consider setting up a donor advised fund.  By donating highly appreciated long term stocks or mutual funds to a donor advised fund, double tax savings are available.  There is an immediate deduction of the full value of the stock/fund holdings.  You will also avoid paying  long term capital gains taxes (now up to 23.8 percent) on the funds/stock’s donated.

2. Health Savings Accounts (HSAs). If you have a qualified high deductible health plan, put the maximum contribution into a Health Savings Account (HSA) before April 15, 2014.  An individual can contribute $3,250 to an HSA ($4,250 if age 55 or over).  A family can contribute $6,450, with an additional $1,000 contribution possible for each family member age 55 or over. HSA contributions are tax deductible in 2013 (similar to an IRA), while the growth of the HSA funds is never taxed, as long as the funds are used for healthcare expenses (similar to a Roth IRA).

3. Spousal IRAs. If only one spouse works and has no company retirement plan, both spouses may contribute up to $5,500 ($6,500 if age 50 or over) to their individual IRAs, even if one spouse has no earned income.  If the working spouse has a company retirement plan, the other spouse still may still contribute to an IRA and get the full tax deduction, as long as the couple’s joint income is below $178,000. All IRA contributions must be made by April 15, 2014.

4. ROTH IRA Contributions. While not immediately tax deductible, ROTH IRA contributions grow tax free throughout your lifetime and potentially the life times of your heirs.  Even if you are covered by a company retirement plan, ROTH contributions, up to $5,500 ($6,500 if age 50 or over) are permitted, as long as a couple’s gross adjusted income is below $178,000.  For an individual, the income limit is $112K.

5. State Sales Tax Deduction. If you itemize deductions, using the State sales tax deduction in lieu of the State Income tax deduction may prove beneficial.  If you have receipts from your higher-priced purchases (normally taxed at more than 8 percent in Colorado) you may receive a larger tax deduction, especially if you are retired or have relatively low income.  If you have purchased a car, a boat, or any item that would have significant sales taxes, you may deduct the full amount of sales taxes as long as you have the sales receipts.  Unless Congress takes action soon, 2013 may be the last year in which the state sales tax deduction is available.

6. Colorado College 529 Savings Plan. Colorado residents with a child or grandchild may want to consider the College Invest Colorado 529 Savings Plan.  All contributions to a College invest plan receive a Colorado state tax deduction for the amount contributed.  Even if the child is already in college, contributions to be used to cover college expenses in 2014 can be made in 2013 and deducted against 2013 Colorado state taxes, as long as the contribution is made before December 31, 2013.  As an example, if $30,000 of college expenses are expected in 2014, deposit this amount into the College Invest fund before the end of 2013. By doing so, your 2013 Colorado Income Tax bill will be reduced by almost $1,400.  Also, any growth of funds contributed to a 529 College saving plan are never taxed (federal or state), as long as the funds are used for college expenses.

Hopefully, one or more of these tax savings approaches will be helpful in reducing 2013 taxes. Legal tax reductions are another form of savings.  These savings can be invested and used to help one prepare for a financially abundant future.

Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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