2013 Year End Tax Planning Guide

At Aber CPA, we know that tax season and all the preparation that goes into it can cause a great amount of anxiety.   The challenges of collecting and documenting all the necessary paperwork, gathering all necessary knowledge of tax laws and filing your taxes can seem insurmountable.  This is why working with a knowledgeable accountant like Scott M. Aber, CPA comes in handy.  Working with Scott at AberCPA will take an enormous amount of stress of your back when it comes to your 2013 year end taxes and all taxes and financial planning, in general.  In this 2013 year end tax planning guide, you will find the following:

  • 2013 Year End Tax Tips for Saving Money

    • Tax Strategies & Loopholes

      • Tax Deferral Notes

      • Prepaying State & Local Taxes Owed

      • Mortgage Interest Deduction Acceleration

      • Real Estate Taxes Deduction Acceleration

      • Margin Interest Focus

      • Grouping Other Itemized Deductions

      • Reviewing Your Employee Stock Options

    • Timing Certain Taxes Right

      • Who Qualifies?

  • 2013 Federal & State Tax Changes

    • Itemized Tax Deductions Phaseout

    • The 39.6% Tax Bracket Returns

    • Imposition of Two (2) New Tax Provisions on Individuals

      • 0.9% Payroll Tax on Self-Employment Income & Payroll

      • 3.8% Surtax on Net Investment Income (NII)

    • Higher Overall Ordinary Dividend & Capital Gains Tax Rates

    • Details on Expiring Individual & Business Tax Regulations at 2013 Year End

2013 Year End Tax Tips for Saving Money

Who doesn’t want to save money on their taxes?  At AberCPA, we understand that saving money on your 2013 taxes is a priority and we are here to offer suggestions on how you can file your taxes in the best and most financially beneficial fashion.  Although 2013 will witness an extension for tax filing due to the United States 2013 government shutdown, this does not mean you should delay your tax preparation efforts.  Stay ahead of the game and review our suggestions.

Tax Strategies & Loopholes

Indeed, there are tax laws that are quite hidden because tax filing is an art of sorts.  If you are not on top of accounting regulations and a regular visitor to the IRS website, you are going to miss some tax saving opportunities.  We have unlocked some of these secrets below.

Tax Deferral Notes

Do you forecast your future and current year incomes?  This is a must if you want to take advantage of tax deferral strategies.  Even if your tax bracket remains the same from year to year, you can arrange

to accelerate some some of your deductible expenses into 2013 or choose to recognize income in 2014 or a later year- if you play your cards right.  Recognizing income in 2014 that you earned in 2013 will provide you with extra cash if you need it.  Bottom line is that you need to anticipate the money you will generate and the pros and cons of when to recognize it, depending on your financial situation.

Prepaying State & Local Taxes Owed

A little known fact is that you can benefit from prepaying your state or local taxes, which are normally due in the middle of January, in the same year that you owe them- and before you pay your federal taxes.  The logic behind this move is that you can deduct state and local taxes from your income for your federal tax filings.  Be careful though…you will definitely want to confirm with your accountant that you will not be subject to the federal Alternative Minimum Tax (AMT) in your current filing year.  The AMT is a federal income tax rendered upon tax filers at a practically flat rate on a calculated amount of taxable income; sometimes you will hear the AMT called an exemption.  The AMT exemption can be extremely higher than your regular exemption.

Mortgage Interest Deduction Acceleration

Limits are in place as per how much prepaid interest you can deduct in your taxes but let’s explore this idea in the case of your mortgage interest deductions.  If you look at your January mortgage statement, does it include interest that was accrued for December?  If it does, you can deduct this as a 2013 interest expense based on the accrual accounting method.  Check with your accountant to see if you qualify for this deduction.

Real Estate Taxes Deduction Acceleration

Let’s once again look at the guidelines surrounding your AMT requirements but, should you meet them, real estate tax levies which require payment early in the next calendar year can often be prepaid.  You really only have to consider your AMT for real estate taxes on personal real estate like your residence as rental property real estate taxes are deductible without having to worry about an AMT exemption.

Like state and local income taxes, real estate tax levies due early in 2014 can often be prepaid in 2013.

Margin Interest Focus

This one is more simple- don’t worry.  Any security bought on margin in the current calendar year- 2013 for instance- has interest that is only deductible if that interest was paid in 2013.

Grouping Other Itemized Deductions

Watch out for your AMT when compiling your itemized deductions.  As with other deductions, miscellaneous deductions can be a very effective tool for lowering your taxes.  Your total deduction must exceed 2% of your Adjusted Gross Income (AGI).  A lot of accountants, individuals and businesses therefore chose to group their deductions to get to this 2% figure in order to qualify.

Reviewing Your Employee Stock Options

Before the year is over, take a look at your employee stock options.  Employee stock options, when exercised, are generally treated as regular income.  This might not sound desirable but it could be if you think you may be in a higher tax bracket the following year.  Also, remember that future stock appreciation in upcoming years could result in a capital gains tax.  Alternatively, exercising incentive-based stock options could work against you if the spread between the exercise price and fair market value of your stock raises a red flag for AMT purposes.  Contact AberCPA to see what option is best for you.

Timing Certain Taxes Right

For the taxpayer who is lucky enough to have the ability to control the timing of his or her income, timing your income receipt can be very advantageous.  A powerful budget and tax planning tool, income receipt planning is an invaluable tool which may be able to reduce your tax obligations permanently.

Who Qualifies?

Although ideally everyone can qualify for timing benefits, there are three subsets of individuals who usually qualify- they are people who are subject to:

  • An additional 0.9% Medicare tax in one year but not in the other year

  • An additional 3.8% NII tax in one year but not the other year

  • Different tax brackets year over year

2013 Federal & State Tax Changes

Federal and state tax changes are hard to keep up with and, at AberCPA, we understand the headache this can cause you.  We put together a list of just a few changes that we think you should know about.

Itemized Tax Deductions Phaseout

Depending on your AGI, and this is especially pertinent to those taxpayers in higher tax brackets, you may have fallen victim to the phaseout of certain itemized deductions.  This is after the government decided to put its itemized deduction phaseout on hold for the last three years.  As with most government tax changes, the law is complicated and deductions not including medical expenses, casualty and theft losses, gambling losses and investment interest are not part of the phaseout.  Itemized deductions that are subject to limitation are lowered by 3.0% of the amount by which your AGI exceeds a predetermined threshold.  We put together a chart of the AGIs which are subject to the phaseout based on filing status for a visual:

phase-out-itemized-deductions-2013

The 39.6% Tax Bracket Returns

Some other daunting news for those with higher AGIs is the reinstallment of the 39.6% tax bracket.  After a long hiatus, 2013 marks the year that ordinary tax income tax brackets have been adjusted.  Take a look at the new rates in this diagram:

2013-tax-rates

Imposition of Two New Tax Provisions on Individuals

Long gone are the days when reducing your AGI would really only subject to the AMT.  Now, two new taxes have been introduced and they are more complicated than ever.  The two new taxes being levied are with regards to payroll and self-employment income (combined) and net investment income.  The former tax is 0.9% and the latter is 3.8%.  Both taxes will apply to you if your AGI meets the following criteria:

following criteria:

new-taxes-for-2013

0.9% Payroll Tax on Self-Employment Income & Payroll

Let’s begin with the payroll tax since it’s not that difficult to grasp.  Simply put, if you have an AGI higher than the amounts noted above, you will be subject to an additional Medicare payroll tax if you are self-employed.

3.8% Surtax on Net Investment Income (NII)

Not quite as straightforward is the new 3.8% surtax on investment income which now will apply to most investment income.  The amount of your income, if you fall into the AGI income levels in the above table, that will be subject to tax will be the lesser of your NII or your excess modified adjusted gross income (MAGI).  Only the portion of your MAGI that is over the same threshold will be subject.

The question remains as to what will explicitly fall under NII so refer to the following list:

  • capital gains

  • annuities

  • rents

  • royalties

  • interest

  • passively active income

  • dividends

A similar question is what will be excluded from taxation so here is a sample of those items:

  • self-employment income

  • income from an active trade or business

  • gain on sales from partnership active interests

  • gain on sales from S corporations (must have investment assets)

  • IRA distributions

  • qualified plan distributions

  • passive pass-through income

  • some foreign earned income

Higher Overall Ordinary Dividend & Capital Gains Tax Rates

On the capital gains side, long-term capital gains rates are actually favorable and the best way to report income is via this venue.  Take a look at some current rates:

2013-capital-gains-tax-rates

Although a general rule of thumb is that long-term capital gains come from assets held longer than 12 months, an extremely intricate set of netting tax laws will ultimately determine taxation.

Conclusion

With so many tax changes that have happened in 2013, and so many on the horizon, AberCPA is happy to offer you a snapshot of them with our 2013 year end tax planning guide.  A full services accounting firm serving the New York Tri-State Area, we help individuals and businesses plan for their futures, not just the present.  Contact us at (845) 215-5969 or complete our contact form so we can help you through tax time.

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