It is important to plan ahead because of all the new tax law changes. The majority of tax planning needs to be done before the end of the year, so now is the time discuss your situation and take the necessary steps to minimize your tax liability.
- The 3.8 percent Medicare tax will be imposed on unearned income over $250,000 for joint filers. This includes interest, dividends, royalties and rental income.
- For employees, the bulk of write-offs they can get are through their employer. If employer plans are available they can get tax-free benefits, which they should try to maximize. They should take advantage of their tuition reimbursement plan and fully fund their 401(k) plan. Taxpayers 50 or older should take advantage of the catch-up provision, which allows them to contribute an additional $1,000 to their IRA. They should also check out the provisions where benefits are paid out in pretax dollars, such as tax-free reimbursement of child care.
- The energy efficiency credit, which was slated to expire at the end of last year (2012), has been extended for one more year (12/31/2013). While it may be renewed, there is no guarantee, so clients should be advised to make any necessary improvements that qualify for the credit this year.
- Your dependent children to help fund some of their living expenses, each child can earn up to $6,100 in 2013 without having to pay any federal income tax.
- If you are not subject to the Alternative Minimum Tax, consider accelerating your personal tax deductions by paying any state or city estimated income tax payments that are due in January before December 31. Making these payments a few weeks early can reduce federal income tax liability by as much as 39.6 percent of this early payment.
- Taxpayers should adjust their exemptions on Form W-4 so that they are not overpaying or underpaying the taxes withheld from their paycheck.
- Under the Affordable Care Act, there are limited opportunities to deduct medical costs. Starting in 2013, the deduction may be limited to only the amount that exceeds 10 percent (7.5 percent for taxpayers over 65 through 2016) of AGI. This is why having medical insurance through an employer and a Health Savings Account are important, because they allow the taxpayer to pay for these costs in pretax dollars.
- Insurance premium costs for long-term care policies may be partly or fully deductible depending on age and AGI limits.
- If taxpayer’s child has a part-time paying job, consider establishing a Roth IRA in the child’s name. The child can withdraw money from it to pay for college, and the withdrawal will be taxed at the child’s tax rate, which could be as low as zero if structured properly.