The mad dash is on. No, not the hunt for Christmas presents. I’m talking about the hunt for year-end moves that will cut your 2013 taxes. Below, I’ll offer nine worth considering.
If your 2013 income (or your household’s) will be higher than $200,000 or so — the first thing you should do is to meet with your tax adviser.
That’s because you may have trouble figuring out exactly what tax bracket you’ll be in this year due to the combination of new tax changes aimed squarely at America’s wealthiest. Here’s why:
There’s the new 3.8 percent Net Investment Income tax and 0.9 percent Medicare tax, both affecting couples with incomes over $250,000 ($200,000 for singles) as well as the new 39.6 percent top income-tax rate and 20 percent top capital gains rate (for couples with income over $450,000 and singles with income of $400,000 or more). In addition, if your 2013 income is over $300,000 and you’re married or $250,000 and you’re single, you could face a special limit on itemized deductions and a personal exemption phaseout.
(MORE: 6 Investment Mistakes That Can Wreck Your Retirement)
For everyone else, though, “it’s a pretty quiet year from a tax standpoint,” says Kay Bell, the Austin, Texas-based tax expert for Bankrate.com.
That doesn’t mean you need to pay a penny more in taxes than necessary, though. And you might want to grab a few tax breaks that are due to expire this year or shrink dramatically in 2014. My tax-saving suggestions:
1. Look for last-minute deductions and ways to push year-end income into 2014. The time-honored advice to accelerate deductions into this year and postpone income into next year is — with one exception — as sensible as ever.
You could, for instance, bunch deductions by paying tax-deductible expenses, such as next year’s professional dues and subscriptions to trade publications, in 2013 that you might’ve otherwise shelled out in 2014.
“If you’ll be getting a bonus, talk to your employer about possibly pushing it to January,” says Bell. “If you’re self-employed and have billings to go out that might push you into one of the top brackets, you might want to hold off sending invoices until the very end of 2013 or early 2014.”
The exception to this rule: if you’re convinced you’ll be in a higher bracket in 2014 than 2013. In that case, you’ll want to do the reverse, because your deductible expenses will be more valuable next year and you’ll want to minimize income you’ll receive.
2. Ramp up your pre-tax 401(k) contributions if you participate in an employer-sponsored retirement plan. Think of this as a present to yourself, since putting aside extra cash from your December paychecks could provide a more comfortable retirement someday. In 2013, you’re allowed by law to invest up to $17,500 in a 401(k); up to $23,000 if you’re 50 or older.
(MORE: Put Your 401(k) to the Test)
3. If you’re self-employed, consider opening a Solo 401(k) plan at a brokerage, mutual fund or bank. Unlike other retirement plans, you have to open one of these accounts by year-end to lower your 2013 taxes. You have until April 15, 2014 (or the date you file your 2013 taxes) to actually fund the plan. Maximum contribution: $17,500 or $23,000 if you’re 50 or older.
4. Take advantage of your pre-tax Flexible Spending Account (FSA) at work to pay for health expenses. The Treasury Department recently said employers could let employees carry over into 2014 up to $500 in unused balances to avoid the “use it or lose it” rule. But some firms won’t permit this flexibility due to the administrative burden.
Check with your HR department. If you’ll forfeit any leftover FSA cash you’ve set aside, think about wiping out that account balance. “You could have LASIK surgery or go to the chiropractor after dealing with the in-laws at Thanksgiving or get the kids’ dental work done,” says Bell.
(MORE: How to Get the Most Out of Your Health Savings Account)
5. Sell your losing investments to offset your 2013 gains — if you can. “It could be a challenge to find stocks and mutual funds to sell and claim as losses this year considering the stock market gains,” says Bell.
You’ll need to wait at least 31 days after the sale of your losers if you want to purchase the same stocks or funds; otherwise, you won’t be able to claim the losses due to the "wash sale" rule.
6. Give to charity, maybe by donating some of your winning stocks or mutual funds. Generally, you’ll be able to claim as a 2013 itemized deduction any charitable contribution you make in December. But you’ll get a bonus tax benefit by donating some of your appreciated stock or fund shares: You won’t owe taxes on your gains, but you will be able to write off the entire value of your contribution.
7. Grab an expiring tax credit by making your home more energy efficient. You’ll be able to write off as much as 10 percent of the cost of certain energy-saving products, up to $500. (The government’s Energy Star website will show you which items qualify and the size of their credits).
But there are two catches: The size of your credit will be reduced by any amount you claimed for the Residential Energy Tax Credit in the past and you must put the item in use before 2014.
“This is one tax credit that Congress is probably not going to renew,” predicts Bell, who formerly worked on the House Ways and Means committee.
8. If you have a home office or a small business, buy equipment, furniture and maybe even a car for work. That’s because in 2013 you can “expense” or fully write off up to $500,000 for new purchases put in use this year, rather than claim their depreciation over time. (In tax jargon, this is known as the Section 179 Deduction.) In 2014, however, the expensing limit is scheduled to plummet to $25,000.
Bell thinks it won’t drop quite that much, though. “The $25,000 limit will probably be bumped up to a degree,” she says. “But that’s a prediction, not a guarantee.”
9. If you’ll be taking college classes next year, pay for them now so you’ll qualify for the expiring Tuition and Fees Deduction. This write-off, which will disappear in 2014, lets you claim up to $4,000 in tuition expenses, even if you don’t itemize.
But the deduction is not allowed for married couples with total 2013 income above $160,000 or singles with income above $80,000.
If you can get it, though, why not let Uncle Sam help you improve your skills to become a more valuable employee or stronger job candidate?