Friday, November 29, 2013

138 shopping days until April 15

You will want to do some tax planning right now so that you can not only prevent a big surprise but prepare for it if need be.

You need to sit down and project your income and income tax withholding to year-end. Then if you used tax software to prepare your returns, you can enter this information and any other anticipated taxable transactions into the tax software along with your new filing status to see if you will owe or not.

Better yet, visit a tax professional with your projections and a copy of your 2012 income tax return and get an assessment – there may be factors that play in that you are not aware of. After all, the tax code is 73,000 pages long and incomprehensible to the average lay person. Plus a tax professional may guide you to some tax saving transactions that you can implement before year-end.

Listed below are tax-impacting situations that require the help of a professional:

Change in marital status. If you divorced this year or have a divorce that will be final by December 31, 2013, you will transition from the advantageous married filing jointly tax status to single or perhaps head of household if you have dependents or others who will qualify you for that filling status. You may end up owing, so it’s a good idea to find out now so you can adjust your withholdings or otherwise plan for the liability. If you got married this year, you will want to analyze the impact of joint finances on your tax liability. It’s a good idea to combine your finances in a spreadsheet then visit your tax pro to determine if there will be a liability or a refund. Take along your copies of your prior year tax return.

Buying or selling a home. Many folks think that they can write off the down payment, or take deductions for improvements made to their primary residence. Not so. However, if you go from being a renter to being a homeowner, you will enjoy a deduction for property taxes and mortgage interest. So rather than taking the standard deduction, you will be allowed to itemize deductions which will allow for additional write offs such as charitable contributions, DMV fees, state income taxes paid, investment expenses, employee business expenses, and medical, to name a few.

If you sell your home, part of your profit may be taxable. Consult with a tax professional to determine if you will end up owing due to a home sale. Bear in mind that the first $250,000 (single) or $500,000 (married filing joint) of profit is not includable in income for tax purposes. If you went from being a homeowner to a renter, you will likely lose the advantage of itemized deductions and may need to adjust your withholdings accordingly.

Job change. If you change jobs, you will be required to complete Form W4 to declare the number of exemptions you will claim. Depending upon whether there are other financial changes and if you are substantially increasing or decreasing your income, you may want to do some projections to see where you will stand next April 15. Your tax pro can help you determine how many exemptions to claim in order to align your withholdings to your liability.

Retirement. Many baby boomers are retiring and that generally changes their tax picture completely. Running the new numbers will help retirees determine how much should be saved toward taxes and whether or not to have withholdings on their retirement pay or social security benefits.

So before the holiday season hits and you get busy partying, think about and plan for your 2013 tax liability. Come next April you will be glad you did.