Tuesday, July 16, 2013

How to Reduce Your Tax Liability in 2013

FROM MAINSTREET.COM

Single taxpayers have several options to reduce their tax liability each year, enabling them to save more money.

If purchasing a house is not in your immediate plans, tax professionals recommend various methods to lower the amount you pay to the IRS annually.

Investors should take advantage of their employee retirement plans, which are commonly known as 401(k)s or 403(b)s, said Michelle Mullen, a CPA with Briggs & Veselka Co., based in Houston, Tex. The money invested into a 401(k) or 403(b) is tax deferred, which means you do not have to pay taxes on the amount until you reach retirement age and make a withdrawal. The 2013 limit for contributions is $17,500.

Even allocating as little as 3% of your salary into a 401(k) plan adds up quickly, but Mullen suggests stashing away 15% of your salary.

"I recommend that investors save absolutely as much as they can afford," she said. "If you form a savings habit early when you are not making that much money, you won't miss it. Start now. Every little bit counts. If you are already established in your career, it's never too late to start saving and tax planning."

Some companies encourage you to save more money by matching your contributions, which maximizes your savings.

"The first rule is to take advantage of your employer retirement plan," Mullen said. "If you are single without any dependents, you are likely to be in the 25% tax bracket. It is absolutely crazy to pass it up, especially if an employer matches your contributions, which is free money."

Some companies offer a Roth 401(k). Although you don't get a deduction for your contributions, the funds you withdraw when you reach retirement age will be tax free, said Ed Gardner, a CPA and CFP at Edward M. Gardner PC, based in Houston.

Some companies offer both options to put funds into a 401(k) or a Roth 401(k). If you feel that you will be in a higher tax bracket when you retire, a Roth 401(k) contribution might be a good choice.

Another priority is to take advantage of your company's health savings account (HSA). These accounts allow you to allocate a portion of your salary that has not been taxed for medical purposes such as your co-payment during a doctor's visit or for prescription drugs. In order to qualify for a HSA, you must be covered by a high-deductible health plan.

If your medical or prescription bill tallies up to $100, it will cost you only $75, because you would have received a $25 tax benefit, assuming a 25% tax bracket, from contributing the $100 to HSA, said Mullen. The maximum a single person can contribute to a HSA for 2013 is $3,250 which includes employer contributions.

While some investors are "nervous about saving too much," the HSA is a "portable" investment vehicle, she said. This allows you to move the account to your next employer.

While receiving a tax credit for buying a hybrid vehicle is no longer an option because the automakers reached the limit set by the U.S. government, there are credits for those buying a plug-in electric car that can be as high as $7,500 depending on the model and your tax liability, Mullen said.

Single taxpayers have an advantage by choosing where they want to work and live. Relocating to one of the seven states that do not collect an individual state income tax can be an added bonus. If you get a job offer from Texas, Alaska, Florida, Nevada, South Dakota, Washington or Wyoming, it might be worth considering a move to one of those states. You can also deduct the costs of your move, such as hotels, gasoline, mileage and paying for tolls, said Corinne Hillman Vahalik, an attorney at Vahalik & Vahalik, P.C., which based in Brookshire.

If you are not living in one of those seven states, you can lower your tax bill by investing in tax free bonds in your retirement accounts or other tax-free income investments, said Vahalik.

"This option will typically generate a lower rate of income than more aggressive investments, but the investor does not have the tax liability on the earnings," she said.

Some employees who work for multi-national corporations have the opportunity to work abroad. You may be eligible to exclude up to $97,600 of your income and avoid paying federal tax on that portion of your earnings, said Mullen. Some countries abroad do not collect income tax. Another added benefit is that your company may pay all or a portion of your living expenses.

"Don't move for purely for that reason, but it is a good factor to consider," she said.

If you are still paying off student loans, you can deduct the interest you are paying of up to $2,500 per year, depending on your income level, said Vahalik.

Another option is to see if your company offers the educational assistance tax program. If you are taking courses, companies can give their employees up to $5,250 for free each year, said Gardner. Since this amount does not appear as part of your salary, you are not taxed for it.

Educators can deduct what they spend for supplies and other materials for the classroom. Even if you don't itemize, you can deduct up to $250 for those expenses, said Vahalik.

If you are dabbling in a side business, any net earnings over $400 are taxed, she said.

"While all income should be evaluated if you are self-employed, the very small side businesses may not generate self-employment tax," Vahalik said.

If you are searching for a job, any of costs incurred in the hunt can also be deducted.

Before next year rolls around and it is time to file your taxes again, examine whether your tax refund is too high, said Gardner. Instead, adjust your withholdings so you "increase your take home pay so you are not giving extra money to the government. Use the money to pay off credit cards or save it in a tax-free account."

If you are planning on making contributions to your favorite non-profit, consider doubling your donation this year instead of splitting it into the next two years, he said.

Donating stock to a non-profit is another option to lower your tax liability because you can deduct the value of the stock and any gains it has received, Gardner said. Otherwise, when you sell the stock, you incur a capital gains tax and are "giving up money," he said.

Homeowners who are making upgrades have several options. If you purchase alternative energy equipment such as solar hot water heaters, geothermal heat pumps or wind turbines can receive a 30% credit on the cost of equipment, Gardner said.

If you are purchasing double-paned windows, installation or energy efficient doors or an air conditioner, the energy credits have been extended through 2013 for a maximum lifetime credit of $500, he said.

The middle of the year is a good time to look at your return from last year and examine your deductions, Gardner said. Or talk to a tax advisor who can make recommendations on how to lower your tax liability since all contributions, donations and purchases must be made by the end of December.

"Get into a positive habit of gathering tax information on a regular basis, so you can find more deductions with better records," he said. "It all adds up and you can easily save $100 on your taxes. If you want to save on taxes, keep better records