Year- End Tax Planning for Individuals

At the bottom of this post is a checklist of year-end tax planning ideas you should consider.  Year-end tax planning could be extra important this year because timely action could secure several tax breaks that may not be available next year.  These expiring tax breaks include among other things: (a) the option to deduct state and local sales and use taxes instead of state and local income taxes; (b) the above-the-line deduction for qualified higher education expenses; and (c) tax-free distributions from IRAs for charitable purposes by those age 70 and ½ or older.

When doing year end planning, high-income individuals also have to take into account for the first time the 3.8% surtax on unearned income and the additional 0.9% Medicare tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a high-income individual’s approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and NII for the year. Depending on the particular situation, the individual may want to minimize (through deferral or otherwise) additional NII for the rest of the year, or may want to reduce MAGI other than unearned income, or may want or need to find ways to minimize both NII and other types of MAGI.

Employers are required to withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income, and self-employed persons must take it into account in figuring estimate tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual who earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, would owe the additional 0.9% Medicare tax, but there would be no withholding by either employer of the additional Medicare tax since wages from each employer did not exceed $200,000. The additional 0.9% Medicare tax may also be over-withheld. For example, if only one of two married spouses works and individually reaches the $200,000 threshold for the employer to withhold, the couple’s joint income might not be high enough to actually cause the tax to be owed.

Below is a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end.  Not all actions may apply in your particular situation, but you may benefit from many of them.  We can narrow down the specific actions that you should take once we meet with you to tailor a particular plan.  In the meantime, please review the following list and contact me at 937-223-1130 or at your earliest convenience so that we can advise you on which tax-saving moves you should consider.

  Year-End Tax Planning Moves for Individuals

Increase FSA Contribution.  Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA).

Make Full Year HSA Contribution Now.  If you are have a health savings account (HSA), consider making a full year’s worth of deductible HSA contributions in 2013.

Sell Stock to Realize Loss.  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.

Defer Income and Accelerate Deductions.  Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill. Depending on your situation, this strategy may enable you to claim larger deductions, credits, and other tax breaks for 2013 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.

In Some Situations Do the Opposite.  Note that in some cases, it may be beneficial to actually accelerate income into 2013.  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 in  2014 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.

Convert to a Roth IRA.  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 2013.

Consider Recharacterizing Roth Conversion.  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 conversion transaction by  transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2014.

Pay Deductible Expenses by Credit Card.  Consider using a  credit card to prepay expenses that can generate deductions for this year.

Prepay State and Local Taxes.  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 2013 (but make sure this will not create an alternative minimum tax (AMT) problem.

Take Retirement Plan Distribution to pay Estimated Taxes.  Consider taking 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 would not be sufficient to 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.

Don’t Forget AMT.  Estimate the effect of any year-end planning moves on AMT for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are not allowed 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.

Consider Sales tax Deduction.  Accelerate big ticket purchases into 2013 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction.   Unless Congress acts, this election won’t be available after 2013.

Bunch Misc. 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.

Energy Saving Tax Credits.  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 2014.

Prepay Qualified Higher Education Expenses.  Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2013. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with      enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.

Pay Contested Tax Now and Seek Refund.  You may want to pay contested taxes now to be able to deduct them this year while continuing to contest them and seek refund next year.

Settle Claims to Maximize Casualty loss Deduction.  You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

Buy Qualified Small Business Stock.  Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. Such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met.  We can fill you in on the details.

Make a Charitable Gift from IRA.  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 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 2013, but if you do, you will have to take a double distribution in 2014 the amount required for 2013 plus the amount required for 2014. Think twice before delaying 2013 distributions into 2014 to avoid bunching income into 2014 which 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.

Start an Annual Gifting Plan.  Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

AND ONE MORE THING.  Year end tax planning is also important for business owners.  If you own a business, please check out the year-end tax planning checklist for business owners included in an earlier blog or contact me to discuss at 937-223-1130 or



AUTHOR: Jeff Senney