2013 Tax Planning Ideas

There are a number of new thresholds coming into play in 2013.  If someone is in the threshold area, the goal is to keep their net investment income down to get below the threshold.

  • The new Medicare 3.8% tax applies to net investment income of taxpayers with AGI above $200,000 for single filers or $250,000 for joint return filers.  
  • The 3% phase-out of itemized deductions and the 2% phase-out of exemptions have been re-instated. 

 

Managing AGI becomes helpful because you can save tax on phase-outs and net investment income surcharges.  Look at the items that can affect those items - such as the opportunity to max out retirement contributions and anything that is tax deferred.  Also, you should be concerned about taking distributions from retirement plans because they can increase AGI.

 

If self-employed, consider setting up a retirement plan and revisit decisions to contribute to a traditional versus a Roth retirement plan.  Since distributions from Roth IRAs and 401(k)s are not subject to regular tax or the Medicare investment tax, they are a more attractive retirement savings vehicle for high-net-worth individuals.

 

If a taxpayer is close to the new Medicare tax threshold, the taxpayer should consider moving Roth contributions to a traditional retirement plan.  Maximizing contributions to a traditional plan could reduce taxable income below the threshold and avoid the additional 3.8% tax on investment income.

 

  • Long term Capital Gains received a 5 percent increase and are subject to the additional 3.8% Medicare investment tax.
  • Short term Capital Gains are subject to ordinary income rates and the 3.8% Medicare investment tax.

Taxpayers should consider realizing losses on existing stock while maintaining the investment position by selling at a loss and repurchasing at least 31 days later, or swapping it out for a similar, but not identical investment.

 

If a loss in a pass-through entity has been incurred, make sure it is deductible.  Taxpayers can increase their basis in a partnership or S corporation if doing so will enable them to deduct a loss in a desired tax year.

 

If a taxpayer has self-employment income, they should consider any capital expenditures that will be needed in he coming year.  Favorable Section 179 deductions and bonus depreciation have been extended through the end of 2013.  Purchasing qualifying property and placing it in service before the year end will accelerate the depreciation deduction allowed on assets into 2013 and reduce the earnings potentially subject to the .9 percent Medicare surtax.

 

  • Watch Tax Rates

The maximum tax rate for higher net worth individuals has increased from 35% to 39.6%.  This change affects taxpayers with TAXABLE INCOME above $400,000 for singles, $450,000 for married filing jointly, $425,000 for head of households and $225,000 for married individuals who file separately.

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