Brian Frevert //December 4, 2013//
As we near the end of 2013, high-income taxpayers should note several changes to the Tax Code that will affect this year’s returns. A variety of strategies can be utilized to effectively plan before the end of the year.
Specifically, higher income individuals should consider the effects of the following new laws.
Strategies for Dealing with New Tax Laws
Defer Deductions and Accelerate Income
High-income earners that will be in the highest income tax bracket in 2014 but not 2013 should consider deferring deductions and accelerating income for 2013. Likewise they could defer income and accelerate deductions for 2013 if they anticipate 2014 being lower than 2013. For example, a cash method taxpayer can accelerate income by speeding up the billing and collection process. Another example is a taxpayer who sells capital gain property on an installment basis in 2013 and realizes a long-term capital gain could accelerate income by electing out of the installment method.
Consider also the level of income for each year the potential 3.8 percent Medicare tax may apply. Before a deferred or accelerated income or deduction strategy is implemented, consider the potential alternative minimum tax effect. If the situation is right, it could prove to be a smart tax move. Talk to an advisor about potential obstacles to implementing this strategy.
Make Retirement Account Moves Now
Consider converting your traditional IRAs to Roth IRAs or re-characterizing an earlier conversion. Distributions from Roth IRAs are tax-free and may keep a taxpayer from being taxed in a higher tax bracket that would otherwise apply if taxable distributions are taken. Taxable distributions would be included in income to determine if the threshold is exceeded that triggers the 3.8 percent Medicare surcharge.
Allow Deductible Expenditures for Future Needs
Plan for the future and make your deductible expenditures before the end of the year. For example, take advantage of the energy efficiency property tax incentives. If you are self-employed, make your business purchases of machinery and equipment now to ensure they will be deductible on your 2013 return. For tax years beginning after 2013, the maximum expensing limit is scheduled to drop to $25,000, down from the $500,000 limit for 2013.
Contribute to Charities
Individual taxpayers who are at least 70 and a half years old may contribute to charities directly from their IRAs without their contribution amounts appearing in their gross income. By making this move, some may be able to reduce their tax liability more than they would if they were to receive the distribution from their IRA and then contribute the amount to charity. This could potentially eliminate issues on AGI phaseouts.
Visit with Your Trusted Tax Advisor
Lack of year-end tax planning might prove harmful. Meet with your trusted tax advisor to determine which year-end strategies will benefit you. If you don’t have an advisor who will give you a customized plan, find a CPA who will take your particular situation and planning goals into account. Minimizing taxes can be done despite the new tax rules for high-income earners.