Due to the unique differences in everyone’s tax situations, it is important and recommended that you talk with your tax advisor before making any decisions.
Tax Planning to Help Reduce AGI and/or MAGI
With all of the changes coming into effect for 2013 / 2014, the following planning strategies can be used to reduce tax liability by deferring income and accelerating deductions into the most beneficial period.
Qualified Education Expenses -
For 2013, individual taxpayers can deduct up to $4,000 of qualified higher education expenses above the line.
Modified AGI does not exceed for the taxpayer $65,000, or $130,000 for joint filers,
The expense is reduced to $2,000 for taxpayers whose modified AGI exceeds $65,000 ($130,000 for joint returns) but does not exceed $80,000 ($160,000 for joint returns).
For 2013 and 2014, the American Opportunity Tax Credit is an amount equal to 100% of qualified tuition and related expenses not in excess of $2,000 plus 25% of those expenses in excess of $2,000, but not in excess of $4,000.
Maximum credit is $2,500 (2,000 * 25% + $2,000)
Consider prepayment of tuition expense. Unless extended, this credit will expire in 2014.
Student Loan Interest Deduction:
Above the line deduction:
$2,500 of interest on qualified education loans.
For 2013, reduced ratably at MAGI between $125,000 and $155,000 for joint, and $60,000 and $75,000 for others.
For 2014, reduced ratably at MAGI between $130,000 and $160,000 for joint, and $65,000 and $80,000 for others.
Child Tax Credit
Taxpayers are allowed a $1,000 child tax credit for each qualifying child under age 17.
·The amount of the credit allowable is reduced by $50 for each $1,000 (or part of a $1,000) of MAGI above $110,000 for joint filers, $75,000 for single filers, and $55,000 for marrieds filing separately.
In planning, consider the AGI of the current year as well as the estimated MAGI of next year to see if this credit could be available with the acceleration or deferral of income/deductions in either year.
Convert taxable interest to tax-exempt interest
The tax-exempt interest will not be included in AGI (except in determining the taxability of Social Security benefits), and for some individuals, the after-tax amount received from tax-exempt interest might be at least as much as the after-tax amount received from taxable interest.
Convert taxable interest to tax-deferred interest or income
Shift funds to U.S. Series EE bonds or inflation-indexed U.S. Series I savings bonds. Interest on Series EE or I bonds isn't taxed until the bonds mature or are redeemed.
Buy Treasury Bills with term of one-year or less. The income from the Bills won't be included in gross income until the following year.
Pay off debts
If an individual has both income-generating investments and debts on which he is paying interest, he should consider selling part of his investments and using the proceeds to pay off debt.
It reduces AGI
Can increase net income due to offsetting deductions
Increase contributions to 401(k) plans, SIMPLE pension plans, etc.
Some individuals may be able to reduce AGI by increasing contributions to retirement plans such as 401(k) plans, SIMPLE pension plans, and Keogh plans.
Contribute to traditional IRA to decrease AGI
Convert to Roth IRA to increase AGI
Keep track of value over year to determine if re-characterization is helpful.
Increase contributions to health savings account (HSA)
Individuals who are covered by a qualifying high deductible health plan may make deductible contributions to an HSA, subject to certain limits:
Assuming a full year of coverage, max contribution is:
$3,250 for self-only coverage in 2013
$3,300 for self-only coverage in 2014
$6,450 for family coverage in 2013
$6,550 for family coverage in 2014
An additional $1,000 may be contributed by individuals over 50
Payments can be made anytime.
Defer receipt of year-end bonuses.
An employee who believes a bonus may be coming his way may request that his employer delay payment of any bonus until early in the following year.
Small Business Stock
Small business stock that was acquired between September 27, 2010 and before January 1, 2014 and held for more than five years qualifies for a full 100% exclusion.
Stock that is acquired after December 31, 2013 reverts back to 50% and 60% for empowerment zones.
Consider having clients purchase such stock before year-end.
For 2013 and later years, long-term capital gains are taxed at a rate of:
20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income
15% if they would be taxed at above 15% but below 39.6% if they were taxed as ordinary income
0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income
In addition to these rates, the taxpayer may be subject to the additional unearned income tax of 3.8% based on the Affordable Care Act tax, making the top Capital Gain rate of 23.8%.
Take capital losses in 2013
Consider taking losses in 2013 to reduce AGI by offsetting capital gains and $3,000 of ordinary income.
This will also help to reduce MAGI and limit the amount of surtax liability.
To preserve investment position, it may be advised to sell a stock and buy it back at least 31 days later to prevent a wash sale.
Investment Income Surtax
For tax years beginning after 2012, a 3.8% surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount
$250,000 for joint filers or surviving spouses,
$125,000 for a married individual filing a separate return, and
$200,000 for other taxpayers.
The 3.8% surtax applies to a trade or business if it is a passive activity of the taxpayer, or a trade or business of trading in financial instruments or commodities. Does not apply to active activity of any entity. Capital gains are included in the surtax.
Methods to reduce Surtax Liability
The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:
Use Grouping to take advantage of PAL.
Use Installment Method to spread out gain on sale over multiple years.
Use like-kind exchanges to defer gains
Look at timing for sale of home
Recognizes losses to offset gains
Use Roth IRAs (not included in MAGI or NII)
Conversion to Roth IRA timing
Sell securities at a loss to decrease investment gains.
Timing considerations for required minimum distributions
Taxpayers who attain age 701/2 in 2013 are allowed to delay taking their first RMD (i.e., for 2013) until their required beginning date of Apr. 1, 2014.
Taxpayers who are age 701/2 or older can reduce this year's taxable RMD, and thereby reduce MAGI, by making a qualified charitable distribution (QCD)
Affordable Care Act
Beginning January 1, 2014, individuals will be required to carry minimum essential coverage. Individuals that fail to have insurance will be subject to a fine of $95 or 1% of taxable income, it will increase to $325 or 2% in 2015 and $695 or 2.5% in 2016.
Employer Mandate –
Postponed until 2015. Calculated based on the prior year staffing numbers. Starting on January 1, 2014, business with an average of 50 Full Time employees will be required to provide their employees with Affordable Care Act compliant insurance or pay a heavy fine.
Employer and Insurer Reporting –
Requires large employers starting in 2015 to file an information return that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year.