Individual Tax Planning

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Year-End Tax Planning Moves for Individuals
  • Increase Flexible Spending Account (FSA) - Increase the amount you set aside for next year in your employer's health FSA if you set aside too little for this year.
  • Fund Health Savings Account (HSA) - If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for the current year.
  • Harvest Capital Losses - Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • Postpone Income or Accelerate Deductions - Postpone income until the next fiscal year and accelerate deductions into the current year to lower your current year tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for the current year that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into the current year. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year or where lower income will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • Defer Bonuses - It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until next year.
  • Prepay Expenses - Consider using a credit card to prepay expenses that can generate deductions for this year.
  • Accelerate State & Local Income Tax - If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into the current year if doing so won't create an alternative minimum tax (AMT) problem.
  • Bunch Itemized Deductions - 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 deductions.
  • Consider AMT - Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for the current year, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
  • Make Residential Energy Saving Improvements - 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 the next fiscal year.
  • Pay Contested Taxes - You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • Settle Insurance Claims - You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Make Roth IRA Conversions - If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for the current year.
  • Recharacterize Roth IRAs - If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • Take Qualified Retirement Plan Rollover Distributions - Take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2013. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2013, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.
  • Make Charitable IRA Contributions - 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. Such a transfer, if made before year-end, can achieve important tax savings.
  • Take Required Minimum Distributions (RMDs) -  Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first required distribution to the current year, but if you do, you will have to take a double distribution in the next fiscal year-the amount required for this year plus the amount required for nex year. Think twice before delaying this year's distributions to next year-bunching income into the next fiscal year might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in the next year if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.

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Corn & Corn, LLP

13915 Burnet Rd, Suite 402,
Austin, TX 78728
T: (512)476-6006
F: (512)476-0657
E: info@cornandcorn.com

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