Last week, one of my cable channels held a Christmas-in-July event, where they showed Christmas movies the whole week. The thought occurred that if it’s time to start thinking about Christmas, then it’s also time to begin considering end-of-year tips and planning strategies to offer clients as we approach the beginning of fall.
“This year it’s more important than ever to plan ahead because of all the new tax law changes,” said John Vento, a New York-based CPA and CFP. “Of course, 99 percent of what you can do has to be done before the end of the year, so now is a good time for clients to take stock of their financial situation and take the necessary steps to minimize their tax liability.”
Vento, whose recently published book “Financial Independence—Getting to Point X” incorporates tax planning strategies for professional advisors, cites the 3.8 percent Medicare tax. “It’s important for clients to know whether or not it will apply to them, and, if possible, being able to maneuver your investments to minimize exposure to that tax.”
The Medicare tax will be imposed on unearned income over $250,000 for joint filers. This includes interest, dividends, royalties and rental income.
Vento advises clients to check with their HR department to fully understand the extent of benefits available to them. “For employees, the bulk of write-offs they can get is through their employer,” he observed. “If they can get tax-free benefits, they should try to maximize them. They should take advantage of their tuition reimbursement plan and fully fund their 401(k) plan. If they’re 50 or older, they should take advantage of the catch-up provision, which allows them to contribute an additional $1,000 to their IRA. They should also check out the provisions where benefits are paid out in pretax dollars, such as tax-free reimbursement of child care, and even transit passes.”
The energy efficiency credit, which was slated to expire at the end of last year, has been extended for one more year. While it may be renewed, there is no guarantee, so clients should be advised to make any necessary improvements that qualify for the credit this year.
Vento noted that if you find a job for your dependent children to help fund some of their living expenses, each child can earn up to $6,100 in 2013 without having to pay any federal income tax.
Some others among the hundreds of tips Vento offers:
• If you are not subject to the Alternative Minimum Tax, consider accelerating your personal tax deductions by paying any state or city estimated income tax payments that are due in January before December 31. Making these payments a few weeks early can reduce federal income tax liability by as much as 39.6 percent of this early payment.
• If your clients are planning a wedding, they may want to consider postponing it until January to avoid the marriage penalty faced by many married couples where both husband and wife are earning good amounts.
• Taxpayers should adjust their exemptions on Form W-4 so that they are not overpaying or underpaying the taxes withheld from their paycheck.
• Under the Affordable Care Act, there are limited opportunities to deduct medical costs. Starting in 2013, the deduction may be limited to only the amount that exceeds 10 percent (7.5 percent for taxpayers over 65 through 2016) of AGI. This is why having medical insurance through an employer and a Health Savings Account are important, because they allow the taxpayer to pay for these costs in pretax dollars.
• Insurance premium costs for long-term care policies may be partly or fully deductible depending on age and AGI limits.
• If taxpayer’s child has a part-time paying job, consider establishing a Roth IRA in the child’s name. The child can withdraw money from it to pay for college, and the withdrawal will be taxed at the child’s tax rate, which could be as low as zero if structured properly.
• If the taxpayer is starting a business as a corporation, take advantage of Section 1244 stock. If the business fails, up to $50,000 of the loss can be deducted against ordinary income if the taxpayer is filing as single, or up to $100,000 if filing jointly.
Note: The original posting of this story had a different introduction.