by Elaine Cain, CPA, CGMA, Principal

It’s hard to believe that 2013 is nearing a close, the holidays are upon us, and our lists of New Year’s resolutions are starting to fill our minds.  But, many of us are also looking for ways to reduce our 2013 tax liability a little bit further before stroke of midnight.  Well, here are a few ideas, and we hope that you will call on us to discuss items further.

Year End Tax-Planning Moves for Individuals

  • If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. This provision is scheduled to end in 2013, unless Congress acts to extend it.  The Qualified Distribution to Charity can be an effective tax savings strategy.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductionss.
  • If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2014, and you haven’t previously utilized the credit.
  • Don’t forget the 0% long term capital gains rate available to taxpayers falling in the 10% / 15% brackets. This may be an opportunity to sell certain capital assets to reposition, and pay no tax on those gains. Contact us to discuss your personal situation.
  • If you are in a lower income tax bracket or perhaps have experienced a business loss to offset, you may want to consider converting a regular IRA to a Roth. With proper analysis and a target conversion amount, this can be an opportunity to remove taxable income in future years. Keep in mind that this can cause additional taxable income in the conversion year, so please call our tax experts to discuss and analyze conversion opportunities, pros and cons.

Estate and Gift Tax Considerations

  • The current gift tax annual exclusion is $14,000 per donee, whereby you can transfer cash or assets without incurring gift tax or utilizing your lifetime exemption. We would appreciate the opportunity to discuss the utilization of this annual exclusion in connection with your estate plan, as well as an income tax reduction strategy to shift income to donees that might fall in a lower tax bracket.
  • The Lifetime Estate, Gift & GST exemption is now at $5,250,000 for 2013 and will go to $5,340,000 for 2014. In addition, portability of unused exemption amounts between spouses is available, but there are additional filing requirements to claim the unused exemption. Please contact your YHB partner or manager or one of our Family Wealth Planning team members to discuss your estate plan and how to capitalize on these increased exemption amounts, and coordinate with your annual gifting program.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Businesses may consider making expenditures that qualify for the Section 179 depreciation write-off.  Through 12/31/2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. (And a limited amount of expensing may be claimed for qualified real property.)  However, for tax years beginning in 2014, the dollar limit is scheduled to drop to $25,000, the beginning-of-phaseout amount will drop to $200,000, and expensing won’t be available for qualified real property.
  • Businesses also might consider making expenditures that qualify for 50% bonus first year depreciation for qualifying property if bought and placed in service this year.  In general, this bonus depreciation won’t be available next year unless Congress acts to extend it.  Therefore, if you can accelerate an asset purchase and place an item into service by 12/31/13, it could result in tax savings for 2013. Note that this benefit is only available for brand new property, and cannot be utilized for used property purchases.

Year-End IncomeTax Planning for Trusts and Estates

Trusts and estates reach the maximum tax brackets of up to 39.6% on ordinary income and 20% on long-term capital gains at just $11,950 of taxable income.  Also, trusts and estates are subject to the new 3.8% tax on undistributed Net Investment Income in excess of this same threshold. Therefore, trustees and executors should consider these potential year-end strategies:

  • Review your portfolio with your investment manager to consider realizing losses to offset capital gains.
  • In some situations, it may be beneficial to accelerate deductions at the trust level to potentially reduce taxable income.
  • Consider making discretionary distributions to beneficiaries of complex trusts and estates to carry out the trust’s taxable income to beneficiaries that are potentially subject to lower rates.
  • Consider making distributions early in 2014 to carry out income to beneficiaries in 2013 under the 65-day rule.

This is just a brief listing of the opportunities for tax saving strategies at year end.  Each of these strategies have complicated rules and limitations, and their benefits are also dependent on your personal tax situation, so you should discuss these with YHB before implementing.

In addition, here is a quick review of several of the major tax rate changes which took effect in 2013:

Marginal Tax Rates:  The top marginal rate for individuals, estates, and trusts will go from 35% to 39.6% on taxable income exceeding:

$ 450,000 for joint filers

$ 400,000 for single filers

$ 425,000 for head of household filers (HOH)

$ 225,000 for married filing separately

$   11,950 for trusts and estates (on undistributed income)

 

 

Income Tax Rates for Long-Term Capital Gains &  Qualified Dividends for 2013

 JOINT RETURNSSINGLESHOHTrusts & Estates
0% –Up To$  72,500$  36,250$  48,600$ 2,450
15% –From$  72,501$  36,251$  48,601$ 2,451

 

 

 To$450,000$400,000$425.000$11,950
20% –More Than$450,000$400,000$425,000$11,950

 

Two New Taxes in effect for tax year 2013:

Additional Medicare Tax on W-2, Self Employment and other Earned Income:  Additional 0.9% tax will be assessed on earned income in excess of $ 200,000 Single/ $250,000 MFJ/ $125,000 MFS

3.8% Surtax on Net Investment Income:  applicable over and above same $200,000/$250,000/$125,000 thresholds of Modified Adjusted Gross Income.