As the weather turns colder and the holidays are approaching, there is still enough time to do some year-end tax planning with an eye toward keeping as much of your money in your pocket as you can instead of shipping it off to Washington next April. Here are some tax savings techniques that may help you accomplish just that.
One simple thing to do now is to review the income that you have received year-to-date, along with the amount of taxes you have had withheld or paid as estimated payments. This review of your income versus tax payments is critical if you are a recent retiree, since you may not had enough experience in managing your taxes in retirement to achieve right mix of income and taxes payments.
Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.
Even if you haven’t paid in enough taxes yet, there is still ample time to take advantage of tax-saving strategies, such as last-minute 401(k) contributions, income deferral (if possible), charitable contributions, and prepayment of property taxes.
Here is a tax goodie you can trot out if you are way behind in your withholding/estimated payments, provided that you are older than 59 1⁄2 and have a traditional IRA: take a distribution from your IRA before year end and withhold all of the distribution in taxes. By taking this approach, you can catch up with your tax payments without any late penalties, since the IRS considers this tax payment as having been made throughout the year. Additionally, you can make one last estimated payment in January 2014 and avoid other tax penalties.
If you own stocks that are not part of a qualified plan, and if you are charitably inclined, you may want to consider gifting highly appreciated stock to your favorite charity. Your charitable deduction would be the value of the stock when you make the gift, not the price you paid for the shares when you purchased them. If you are in the highest tax bracket, this gifting strategy is of greatest value to you.
Another year-end winning strategy for the charitably inclined is to donate your required minimum distribution from your IRA custodian/trustee directly to a charity. Persons over 70 1⁄2 can transfer up to $100,000 before year end. There is a cascading effect of such a transfer, since the amount of the donated RMD is not included in one’s adjusted gross income, and this fact means that certain phase outs of other deductions that are tied to AGI might be averted.
Additionally, this IRA transfer is most valuable for those philanthropic individuals whose charitable contributions are already up against the 50 percent of AGI limit. Again, since the transferred distribution is not included in AGI, a charitable donation can be made without being included in the 50 percent of AGI limitation.
Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.
Even if you haven’t paid in enough taxes yet, there is still time.
There is another winning tax strategy for those persons who are participants in high deductible health insurance plans that provide for contributions to Health Savings Accounts. These persons can actually invest those dollars inside the HSA and use the accumulated values for retirement and not for health care expenses. They get a deduction for these contributions; growth in the plan assets are tax deferred; and monies may be withdrawn income tax-free for qualified health care expenses at any time in the future. Withdrawals for any other purpose after age 65 are taxable.
One final note, remember that the 2013 threshold for including medical expenses in itemized deductions is now 10 percent of AGI for taxpayers under age 65. The 7.5 percent limit for those older will remain until 2017.
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