John Wyckoff, The Daily Record Newswire
Even though January is only a couple of weeks away, there is still time to plan year-end strategies for minimizing 2013 tax liability. A better understanding of itemized deductions, investment returns, IRA contributions and other key areas can inform decisions, and help investment portfolios and tax planning in the near future and beyond. Here is a broad overview of some year-end tax-planning tactics.
Timing, deductions, credits
It’s important to note that planning begins by obtaining a good sense of expected 2013 income, adjusted gross income (AGI) and corresponding tax bracket.
When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, people can defer their taxes on that income until 2014. Or, if someone expects to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move.
Then estimate AGI by deducting common adjustments from expected income, such as 401(k) and individual retirement account (IRA) contributions, alimony and student loan interest payments. These are adjustments that can be taken even without itemizing.
Next, take a close look at other common deductions and tax credits. A deduction reduces taxable income — that is, the amount of income on which tax is calculated.
How much a deduction saves depends on a person’s tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330.
Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.
Unlike a deduction, a tax credit directly reduces tax liability. Whatever a person’s tax bracket, generally speaking, a $1,000 tax credit saves $1,000 of tax. There are several tax credits people may qualify for, such as tax credits for children, post-secondary education for someone in a household and even a saver’s credit.
Investment income
Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If someone has realized capital gains on investment sales this year, tax liability can be lowered by generating offsetting losses. Capital losses can be used to offset gains, plus up to $3,000 of ordinary income.
Conversely, if someone has already sold some investments at a loss, capital gains can be taken on appreciated stock that the person may have been hesitant to sell because of tax consequences. As long as the gains aren’t more than available losses, the person will be able to take them without the tax liability.
High-income earners may be subject to the new 3.8 percent Medicare tax on investment income. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their AGI is greater than $200,000 for single filers, and $250,000 for married filers. Working to reduce AGI to below the appropriate threshold could help avoidance of this tax.
What works best for you
On a final note, remember that pre-tax contributions to an employer’s retirement savings plan and/or deductible contributions to an IRA can reduce current taxes as well as help retirement savings. If possible, try to max out retirement plan contributions for the year.
Deciding on the most appropriate tax-planning tactics can be a challenge for even the savviest saver. Work with both an investment adviser and a tax professional to gain clarity on how to minimize tax liability and determine which strategies make sense for your investment portfolio.
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John Wyckoff is a senior investment counselor with StanCorp Investment Advisers. Contact him at 971-321-8090 or at john.wyckoff@standard.com.
