Tax planning for 2013 is based on law currently in effect, with little possibility of changes in the near future. A huge difference to the landscape this time last year, when many looked at the uncertainty of extension of provisions that had expired and the glooming thought of what would happen to the so-called Bush tax cuts. Many of the provisions were extended and the Bush tax cuts were extended with some sense of permanency, while others were legislated to expire on taxpayers with higher incomes.
Congress is still debating over budget issues, and there are further discussions on the topic of tax reform. As of this writing, there are no clear signs of how this issue may end. Tax rates and tax breaks, including provisions that expire annually, are at risk.
Some items of interest for the 2013 tax year include higher marginal tax rates, higher capital gains rates, reinstated phase-out of itemized deductions and personal exemptions for those taxpayers whose income exceeds certain thresholds.
Tax provisions that expire at the end of 2013 provide some significant planning opportunities:
The exclusion for income generated on the extinguishment of debt on a principal resident expires this year. Taxpayers who find themselves in foreclosure or possibly in a situation where some of your home mortgage debt has been forgiven should consider completing the paperwork before December 31, 2013 because this provision is scheduled to expire then.
If you qualify for an IRA distribution directly to a charity (you must be age 70-1/2 or older) do it before December 31, 2013. The direct payment does not add to your adjusted gross income or to your charitable deductions for this tax year.
Other provisions expiring at the end of this calendar year include the residential energy credit, the $250 per year teacher's classroom expense deduction, the deduction for mortgage insurance premiums paid as part of your monthly home payment, and contributions of property for conservation purposes.
2013 saw the increase in tax rates for filers with taxable income in excess of $400,000 if single, and $450,000 if joint returns are prepared. These taxpayers will see a return of the maximum 39.6 percent ordinary income tax rate and a return of the phase-out of itemized deductions and personal exemptions. The phase out could impact deductions such as state and local income tax, mortgage interest, charitable contributions and miscellaneous itemized deductions.
In 2013, the amount of the medical expense deduction for taxpayers under the age of 65, changes due to adjustment of the threshold from 7.5 percent of AGI to 10 percent of AGI. It will be more difficult for these taxpayers to tax a medical expense deduction, so closer attention should be paid to "bunching" the deductions in every-other year.
Medicare taxes are rising for taxpayers with earned income in excess of $200,000 if filing single and $250,000 if filing a joint return. This tax, which was enacted to help pay for health care reform, is an additional 0.9 percent on the amount of earned income above the thresholds listed above. In addition to the earned income, a new 3.8 percent tax on net investment income calculated on the lesser of the amount of net investment income or adjusted gross income over the threshold amounts listed above. There is still confusion as to what constitutes net investment income of passive, business and rental investments. These taxes should be calculated and included in your estimate tax payments for 2013.
These points create the need to review and anticipate income and deductions for 2013, and to review the opportunities available to plan before the end of the year. Look at strategies to monitor income levels if they are near the threshold amounts. This could include postponing income is possible, increasing deductions where necessary, and adjusting the type of income you generate for tax purposes. For example, if you have rental property subject to the Medicare tax, you may consider performing and paying for necessary repairs before December 31. At a 39.6 percent income tax rate, a 3.8 percent Medicare tax rate and a five percent State tax rate, the tax amounts add up.
Planning includes a thorough review of the income sources, the type of income and how all of it may affect your tax return. Deduction planning is just important. You still have a few months to plan. The more time you give yourself, the better your chance to end the year with a planned result.
Gerard J. Kassouf, CPA is a director at the Birmingham, Alabama firm of L. Paul Kassouf & Co. P. C., Certified Public Accountants and Advisors--representing privately-held and family-owned businesses. You can reach him at HYPERLINK "mailto:gkassouf@kassouf.com" gkassouf@kassouf.com
