As we enter the last quarter of 2013, you should be considering strategies that will help minimize this year’s tax burden. For example, now’s the time to figure out if you’ll be subject to this year’s higher capital gains and dividend taxes. If so, you might want to maximize deductions and credits ahead of tax season.
After all, the bulk of the tax provisions mandated by the Patient Protection and Affordable Care Act (ACA) took effect in 2013. High-income taxpayers (individuals with a gross income of more than $200,000 or married couples filing jointly earning $250,000 or more) will have to pay an additional 0.9 percent Medicare tax on some wages and 3.8 percent on net investment income or a portion of their income.
The ACA also reinstated personal exemption phase outs, with exemptions reduced by 2 percent for each $2,500 of income that exceeds a threshold of $250,000 ($300,000 for joint filers). The limitation on itemized deductions was also reinstated, reducing the value of most itemized deductions by 3 percent of adjusted income for individuals earning more than $250,000 ($300,000 for joint filers), but no more than 80 percent of impacted itemized deductions.
If you haven’t contributed the maximum amount to qualified retirement plans, consider adding money before the end of the year. Retirement plan contribution limits for 2013 are:
- $17,500 a year into qualified plans ($23,000 if you’re 50 or older)
- $5,500 for IRA contributions ($6,500 if you’re 50 or older)
Dec. 31, 2013, is the last day you may establish a qualified retirement plan for 2013 contributions. You may make tax deductible IRA contributions if your modified adjusted gross income is less than $69,000 ($115,000 for joint filers).
On the other hand, consider if you need to take required minimum distributions from your retirement accounts or annuity distributions, and be sure to factor this into this year’s taxable income.
Also review your overall asset allocation and consider making adjustments to realign with your goals. If you act by the end of the year, you might be able to harvest gains and offset them with losses to reduce your 2013 tax liability. The deadline to sell securities to realize a gain or loss is Dec. 31, 2013. However, take note of “wash-sale” rules. These will not allow you to deduct capital losses on the sale of a particular security if you initiate a similar position within a 61-day period (30 days before the sale date and 30 days after the sale date). Note that these rules apply across both taxable and nontaxable accounts in your portfolio.
Review and update your estate plan to take advantage of the higher lifetime exemption to transfer wealth without triggering a gift tax liability. Currently, the lifetime gift exclusion is $5.25 million. But you can gift as much as $14,000 a year to as many people as you like outside of the lifetime limit. Rather than gifting cash, think strategically about charitable contribution options. For example, consider donating highly appreciated stocks. Although the deadline for 2013 donations is Dec. 31, you might need some lead time in order for the donation to be completed by the deadline.
For same-sex married couples, don’t dismiss the potentially generous tax advantages courtesy of the Supreme Court overrule of Section 3 of the Defense of Marriage Act (DOMA). This Act – for federal purposes – previously defined marriage as between one man and one woman. New tax advantages ensuing from this ruling include:
- Filing joint income tax returns
- Claiming the marital deduction for gift and estate tax purposes
- Naming your spouse as the beneficiary of a qualified retirement account
- Electing portability of a deceased spouse’s unused exclusion amount
- Combined inter-vivos gifts
- Social Security, Medicare and Medicaid benefits for a spouse
Check with your tax and investment advisors to be sure that you are doing all you can to minimize your tax burden this year.