Midyear Tax Planning for 2013

Higher-income taxpayers will bear the brunt of the tax changes this year.  This year, thanks to new taxes plus increases of old taxes for 2013 - it is more important than ever to employ strategies to reduce payments to the IRS.

Keeping track of thresholds for higher income taxpayers can be confusing as they differ from tax to tax.  A new 3.8% surtax on certain investment income kicks in for single filers with AGI above $200,000 (joint filers above $250,000).  Meanwhile, taxpayers with taxable incomes above $400,000 for singles ($450,000 for joint filers) face a new 39.6% top bracket and owe 20% on long-term capital gains and qualified dividends. 

The trick is to avoid crossing the line.  Also, keeping an eye on AGI might hold down the amount of your Social Security benefits that are taxed and reduce the odds that you will owe an income-related Medicare premium surcharge. 

Whatever income bracket you may fall, the following steps can help trim your tax bill:

1.  Increase Retirement Savings:  You can contribute up to $23,000 in a 401(k) if you are 50 or older.  IF you are self-employed and age 50 or older, you can contribute up to $56,500 to a solo 401(k).  Older taxpayers can make $6,500 in deductible contributions to a traditional IRA.

2.  Track Medical Expenses:  Taxpayers who are younger than 65 will have a tougher time coming up with deductible medical expenses this year.  Starting in 2013, you can write off only costs that exceed 10% of AGI, compared with 7.5% in the past.  If you are age 65 and older, you still qualify for the 7.5% threshold.

3.  Investment Decisions:  The new 3.8% surtax applies to "net investment income," which includes interest, dividends, captial gains, rents, royalties and annuity payments.    The surtax applies to the samller amount of net investment income or the amount by which modified AGI exceeds the thresholds. 

 

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