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Tips for 2013 Tax Returns:
1. Begin the process of preparing
your tax information early, but don’t necessarily file early.2. Contribute to a tax-advantage account to reduce taxable income.
3. Take advantage of time-savers, but remember saving tax is your real goal.
4. If you are a high earner, see whether you underpaid taxes.
5. Purchase health insurance by March 31 if you are not already covered to avoid penalties next year.
6. For same-sex spouses, choose your federal filling status.
7. Use your 2013 tax return to start planning your 2014 tax strategy.
For
the first time in several years, the new year arrived without a lot of
last-minute federal tax legislation. That is good for taxpayers trying to
figure out where they stand.
But
less confusion doesn’t necessarily mean you’ll owe less taxes. In fact if you’re
a high earner or had a good year in the stock market - as many investors did -
you could see a significant increase in your tax bill, thanks to a new top tax
bracket, a higher top rate for capital gains, Medicare tax increases for some
taxpayers, and the return of PEP and Pease (i.e., the phase of itemized
deductions and personal exemptions).
No
matter what your income level, it’s wise to start preparing early for the April
15 tax-filing deadline. In addition to helping you avoid unpleasant surprises
and possibly even helping you lower your tax bill, evaluating your tax
situation now could reveal areas where you can implement a smart tax strategy
in 2014. Here are 7 things to keep in mind as you prepare your 2013 tax return.
1. Begin the
process early, but do not necessarily file early.
If
you like to be among the first tax payers to get a refund, you will have to sit
tight for a few extra days. The government shutdown last October put the IRS
behind schedule in preparing for this year’s tax-filing season. So instead of
starting to process returns on January 21, as it initially intended, the IRS
will start opening the first returns on January 31. Take the extra time to
gather all your paperwork. Especially the items you have questions about.
2. Contribute to a
tax-advantage account to reduce your taxable income.
For
many taxpayers, contributing to a tax-advantage saving account provides the
biggest potential for tax savings. Although it is too late to make 2013
contributions to a 401(k) or similar work place savings plan, you might still
have other options. The rules for IRAs, SEP-IRAs, and health saving accounts
(HSAs) all allow 2013 contributions to be made right up to the tax deadline. If
you don’t already have one of these accounts, you can still open one before
April 15 and make a 2013 contribution, if you are eligible. Here’s a quick
overview of each, but you will need to explore them further to understand their
tax advantages and eligibility requirements.|
|
Eligibility
|
2013
Contributions Limits
|
Tax
advantages
|
|
Traditional
IRA
|
Under age 70 ½
Must have
employment Compensation
|
$5,500 under age
50
$6,500 age 50 and
older
|
Tax-deferred
growth²
Contributions may
be tax deductible³
|
|
Sep
IRA
|
Must be a sole
proprietor, a business owner, in a partnership, or earning self-employment
income by providing a service.
|
Lesser of:
25% of
Compensation
Up to $51,000
|
Tax-deferred
growth²
Contributions may
be tax deductible³
|
|
Health
Savings Account
|
Covered by a high
deductible health plan
Not enrolled in
Medicare
Cannot be claimed
as a dependent on another person’s tax return
|
$3,250 for
singles
$6,450 for
families
$1,000 additional
if age 55 or older
|
Triple tax
advantage: Contributions,
earnings and
withdrawals are federal tax free when used for qualified medical expenses
|
3. Take advantage
of time-savers, however never lose sight of the real goal – maximizing your
refund or reducing the taxes owed.
Gathering
documents and evaluating your options can be time consuming. But you might be
able to take advantage of a couple of options that could make life just a bit
easier at tax time.
Consider
the new simplified option for home
office deduction. Rather than filling out a 43-line form that requires you
to enter a percentage of household expenses for utilities, mortgage interest,
repairs, and other items, you can simply deduct $5 for each square foot of home
office space you use as an office. The limit is 300 square feet, for a maximum
deduction of $1,500. Keep in mind that your home office must still meet certain
requirements, such as being used regularly and exclusively for business. As
always, we calculate the simplified deduction as well as actual expenses to use
the highest deduction possible.
4. If you’re a high
earner, check your tax liability early.
For
2013, Congress enacted several tax increases for people with high income,
including:
A new top marginal tax rate of
39.6% (it was 35% in 2012) on income above $400,000 for singles and $450,000
for married couples filing jointly.A new 20% tax rate on capital gain and qualified dividends (it was 15% in 2012) for taxpayers who are in the 39.6% marginal tax bracket.
A 3.8% Medicare surtax on the lesser of net investments income or modified adjusted gross income above $200,000 (singles) and $250,000 (couples).
An additional Medicare payroll tax of 0.9% on earned income above $200,000 (singles) and $250,000 (couples).
High-income
taxpayers are also subject to limits on exemptions and deductions in 2013. The
income threshold for the Pease and PEP (personal exceptions phase-out)
limitations is 4300,000 in adjusted gross income (AGI) for joint files and
$250,000 for singles. The Pease limitations reduces the value of charitable
contributions; mortgage interest; state, local, and property taxes; and
miscellaneous itemized deductions. For 2013, this limitation is the lesser of
3% of AGI above the threshold up to 80% of the amount of the itemized
deductions otherwise allowable. The Pep limitations reduces the total personal
exemption by 2% for every $2,500 of income above the same income thresholds
with no upper limitations. That means it’s possible for some taxpayers to
completely phase-out of their personal exemptions. Confused? Let us do the
calculations for you.
At
this stage, there’s not much you can do to significantly alter your tax
liability, but you can be prepared for the possibility that you underpaid. For
example, your employer is required to withhold the additional 0.9% Medicare tax
when your income exceeds $200,000, but a situation in which two spouses both
earn less than $200,000 but jointly more than $250.000 could have resulted in
under withholding.
Also,
taxpayers with significant capital gains and those subject to the new Medicare
surtax may be required to make estimated quarterly payments. If you didn’t
properly anticipate the effect of the tax increases, you might have paid to
little, which could result in a penalty in addition to any taxes you may owe.
After consulting with a tax professional – you might want to start setting
aside the money you’ll need come April 15.
5. Purchase health
insurance by March 31 if you aren’t already covered.
This
item won’t affect you 2013 tax return, but uninsured Americans who fail to
enroll in an approved health insurance plan under the Affordable Care Act by
the end of March could incur a penalty on their 2014 returns. March 31 is the
open enrollment deadline – the last day you can sign up for 2014 coverage
unless you faced a life-changing event. Although the law required coverage for
all of 2014, the government isn’t going to enforce the penalty on the moths you
didn’t have coverage if you choose a plan by the March 31 deadline and are
covered by May 1. Otherwise, the penalty for 2014 would be the grated of 1% of
annual household income of $95 per uninsured adult and 447.50 per child, up to
$285 for a family. The penalty is prorated according to the number of months
without coverage.
It’s
a milestone tax year for legally married same-sex couples. After the U.S.
Supreme court invalidated a key provision of the Defense of Marriage Act, the
IRS issued new rules that same-sex couples who are legally married in any state
will be treated as being married for federal tax purposes, regardless of
whether the state where they currently reside recognizes same-sex marriage.
That
means that married same-sex couples must make a decision – whether to file a
joint return or to file as a married couple, filing separately. There are pros
and cons to each method, so perhaps the best way to decide is to prepare your
taxes both ways and see which one is best for your situation. Again, this is a
calculation best left to the professionals.
Also,
you need to be aware that the IRS rules do not apply to state tax returns. Some
states recognize same-sex marriage for tax purposes, other do not If you live
in a state that doesn’t, you might have to file three, or as many as four,
returns: a joint federal return or two married-filing-separately federal
returns, and an individual state return for each spouse.
7. Use your 2013
tax return to start planning your 2014 tax strategy.The biggest mistake made by taxpayer’s year in and year out is procrastination. The longer you wait to plan and implement an effective tax strategy, the more difficult it is to have a significant impact on your tax liability. As you prepare for your 2013 tax returns, you will get a good idea of your tax picture. Maybe you can increase your 401(k) contribution, reduce the impact of taxable distributions by investing in exchange-traded funds or municipal bonds, manage your charitable giving more effectively with a donor-advised fund, or pursue a wide range of other strategies.
Taxes
can be complex, and every taxpayer’s situation is different. These tips will
help you get a good start on your 2013 tax return, but be sure to explore
further, perhaps with the guidance of a HGi professional, if you have specific
concerns or circumstances.
