Another year is nearly complete. I hope all of you have a chance to sit back and relax with friends and family this season. DH and I spend a few days reviewing the past year. We go over goals, both financial and personal, and see how we have done against what we planned at the same time last year and then make goals for the coming year. Its surprising how much a few hours of reflection produces in terms of changes or tweaks we need to make as well as making us feel good about areas where we succeeded. If you do something similar, there may be some last minute strategies that you can look into to reduce you tax burden.
Use retirement accounts. If you are in a high tax bracket, this is one of the best ways to reduce your tax burden. If you are in the highest tax bracket, you can save $0.33, in just Federal taxes, on every $ you put into a 401 (k), 403 (b) or IRA. Some pertinent details: 401(k) limits = $16,500 + $5500 in catchup contribution if you are over 50 this year. You have until April 16th next year to make a contribution. IRA limits = $5000. $6000 if you are over 50. With IRAs though your contributions get curtailed if the modified adjusted gross income for couples filing jointly exceed $90K or exceeds $56K for single filers.
Consider a Roth IRA. If you are worried about future tax rates, you can contribute money into a Roth IRA. While you pay tax upfront on the money ou put into a Roth, the growth and future withdrawals are tax free. Limits on contribution are $107K for single filers and 169K for joint. In addition you can convert all or part of a traditional IRA into a Roth irrespective of income levels.
Charity. Charitable contributions are limited to 50% of AGI but can be as low as 20% depending on what type of property and organization you give to. You can also take advatage of donor advised funds. Since you contribute to the funds right now, you can take a tax deduction immediately. You can then gradually reasearch which organization you want to give to before making the contribution. Long term securities can also be contributed and you can deduct the fair market value, potentially eliminating capital gains.
Itemized deductions. By itemizing deductions instead of taking the standard deduction, you can bunch deductions. Things like charity, elective surgery (if it exceeds 7.5% of AGI) and unreimbursed work expenses can be used. Also consider delaying payment for freelance work or asking for your year end bonus to be pushed out to next year to lower you tax burden.
529 plan. This allows you to steadily put aside money for the education of a loved one in a tax advantaged manner. Contribution limits are $13000 per year per beneficiary.
Stock plan strategy. Before exercising stock options grants this year try to estimate if your marginal tax rat might be lower next year, in which case you should consider waiting until next year to do so. You may also owe additional federal tax on restricted stock that vested this year, if you are in a high tax bracket. Usually only 25% Federal taxes are withheld.
Medicare tax on investment income in 2013: Starting in 2013, 3.8% Medicare tax will be due on the lesser of net investment income or modified adjusted gross income over a threshold of $250K for joint filers and $200K for single filers. You might want to talk to your tax adviser on how to prepare and minimze the amount you pay on this tax.
Offset gains with losses. Given the many ups and downs in the stock market, you probably ended up with your share of losses. You can use these to offset capital gains and upto $3000 in ordinary income. If you had a really bad year and still have losses left over, you can use it next year.