Tax planning in 2013 will, thankfully, be far simpler than in 2012. The rise in the top marginal tax rate will affect wealthier taxpayers, no doubt, as well as the extra taxes that are being collected to fund Pres. Obama’s Affordable Care Act. That being said however, the tax liabilities for the average American is now much clearer as well as having simpler strategies to reduce their taxes.
That being said, the Tips below will help you to minimize the tax bite, April 15, 2014. Enjoy.
Tip 1: Start Planning Early. Frankly, outside of specific financial situations most tax tips are generally not worth the paper that they are printed on. That’s why the most vital factor for most people when it comes to tax planning is to have as accurate an assessment as possible of your income for this year and for next. Simply put, the sooner that a person understands what they’re likely income situation will be, the better that they can take care of their tax liabilities.
Tip 2: Be aware of which Tax Bracket you fall into. Most financial experts (including us) will tell you that it’s far better to pay your taxes tomorrow and capture the “time value” that your money can generate rather than paying them today. If deferring your income distributions, whether they are flexible compensation or investment gains, will put you in a lower tax bracket then you should do it. The same rule, more or less, holds true for all of the other income tax thresholds. Of course if deferring somehow pushes you into a higher bracket next year but doesn’t affect this year’s rate, paying your taxes this year is probably a better idea.
Tip 3: Harvest your Tax Losses. Harvesting losses in an investment portfolio with a taxable account is one of the most common ways that people use to offset income. For taxpayers who will earn over $40,000 in 2013, the incentive is even greater. The reason is that the capital gains tax will increase to 20% and, with 2013’s strong equity markets, most investors will see significant capital gain distributions from their mutual funds at the end of the year.
Tip 4: Understand any Special Situations. Here’s a good example; If a taxpayer is over the age of 70 ½ they’re going to need to decide whether to take their first required minimum distribution from their IRA or their 401(k) or if they’re going to defer it for another year until 2014. If it reduces your tax rate this year it may be worth it but keep in mind that you will also have to take twice that amount into your taxable income that year.
These 4 Tips are very “nutshell” Tips and are meant to give you a quick idea about what you should be thinking about as the end of the year gets closer. Frankly, your best bet is to make an appointment and sit down with your trusted financial advisor to determine exactly what you should be doing and not doing.