Start your income tax planning now to save big next April.
New Year's tax planning can be especially profitable for high earners looking to offset the sting of 2013's tax code changes. These include, for couples filing jointly with modified adjusted gross income above $250,000, a new 0.9% tax on wages above that amount, plus 3.8% on some investment income; and for couples over $300,000, new caps on exemptions and deductions.
No matter your income, however, these tips can help you reduce your 2014 burden.
Defer more of your income
Most people with access to a 401(k) don't max out, even though it's the easiest way to cut your taxes. You can put away $17,500 pretax in 2014, plus $5,500 if you're 50 or older. Upping your yearly savings by $5,000 takes $1,400 off your tax bill in the 28% bracket, and if you start in January, you pare only $138 off a biweekly paycheck, says Philadelphia accountant Scott Kregel.
Already stashing the most possible? Families with certain high-deductible health insurance can sock away $6,550 pretax in a health savings account, plus $1,000 more at 55. (Funds not used for medical costs can be withdrawn penalty-free after 65.)
You may also be eligible for a deduction on a traditional IRA, up to $5,500, or $6,500 if you're 50-plus.
Got side income? You could put 25% of it, up to $52,000, in a SEP IRA.
Avoid the new investment tax
That 3.8% investment tax applies to unearned income like interest, dividends, capital gains, and rent, and kicks in for singles whose modified AGI exceeds $200,000 and $250,000 for marrieds filing jointly.
If you'll pass the threshold -- if you earn a lot, say, and expect gains from a home sale -- spread any income you can into next year or beyond, says San Diego CPA Melody Thornton. (For example, postpone exercising options.)
For new investments outside tax-deferred accounts, Joseph DiMaio of West Capital Management in Philadelphia suggests laddering high-quality intermediate-term munis. Interest on municipal bonds is generally federal-tax-free, and "prices on intermediate munis have come down, so their tax-equivalent yields are higher," he says.
Keep better records
Write-offs for business expenses, charitable donations, and medical bills require you to have documentation at tax time. Start the year by implementing a system that allows you to record receipts as you go, so you don't miss any. (That's especially key for medical costs, since the threshold for deductibility increased in 2013 from 7.5% of AGI to 10% for those under 65.)
Greg LaFollette, VP of product strategy at CPA2Biz, likes Shoeboxed.com, a free site and app that lets you upload receipts and categorize them. "At tax time you simply copy the folder and deliver it to your accountant," he says. Better than the actual shoebox you were using before.
|Access to workplace plan?||If your AGI is less than...||You can deduct...|
|One spouse: Spouse who has the plan||$96,001||Max|
|One spouse: Spouse without the plan||$181,001||Max|
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