Take action now for any final tax breaks before the end of the year. Here are some actions to consider taking by December 31…
- Charitable contributions – Donate cash and/or property (including used clothing and household items). Make sure you keep necessary records to prove that you made the donations.
- FSA spending – Use up your pretax health-care flexible spending account (FSA) contributions for 2013 by spending on reimbursable medical items (including itemized medical expenses and over-the-counter medications prescribed by a doctor) or procedures not covered by insurance. Many employers now allow you to carry at least part of the balance into the new year. Check with your employer to find out if you qualify for this.
- Harvesting investment losses – Sell investments for optimum tax results this year. Up to $3,000 of losses in excess of gains can be deducted from ordinary income. Any additional losses can be carried forward to future years. Minimizing investment income can reduce or avoid the 3.8% additional Medicare surtax on net investment income for “high-income” filers.
- Converting your traditional IRA to a Roth IRA – This doesn’t save taxes for the year—it costs you—but it will create tax-free income for the future. The conversion for 2013 must be completed before the end of this year. There’s no limit on how much you can convert. The decision depends in part on whether you are willing and able to pay the taxes that result from the conversion and the impact that the amount converted has on your overall tax bill for 2013.
- Home energy improvements – Certain home energy improvements may qualify for tax credits. Insulation, storm window, energy-efficient heating and air-conditioning systems and certain other items qualify. The top credit overall for 2013 is $500, but there are specific dollar limits on some items.
- IRA transfers to charity – Consider making a direct transfer of up to $100,000 from your IRA to a public charity if you are 70½ or older. The transfer is tax-free. This move lowers your adjusted gross income (AGI), which can reduce the portion of Social Security benefits included in income and make you eligible for more tax breaks.
- Prepaying your child’s college tuition – As long as the semester starts in January, February or March of 2014, you can take the tuition into account when figuring an American Opportunity Tax Credit for 2013.
- Adjusting the income tax withholding – If you estimate that your withholding from pay won’t cover the taxes you’ll owe when you file your 2013 return, ask your employer to increase withholding between now and the end of the year to make up the shortfall.
- Paying local taxes early – You can get a federal tax break for prepaying your state and local property taxes and income taxes that would otherwise be paid in 2014 as long as you itemize deductions.
- Giving appreciated securities to a parent – Your parent can sell them to generate income. If your parent is in the 10% or 15% tax bracket, he/she will pay zero tax on any long-term capital gains from the sale, leaving more after-tax income in the family. This may make for a better Christmas present than even giving cash.
Important: If you are unsure about whether any of the above actions can benefit you or what other favorable steps you can take before the end of the year, call us to book an appointment for a review at 205-451-1945 or click here.