The two biggest ways to lower your 2013 taxes are to increase your deductions before the end of the year or decrease your income subject to tax.
(1) Make additional charitable contributions of cash or property-particularly unwanted household items and clothing. An excellent way to increase non-cash contributions is to make gifts of appreciated property, particularly securities. By doing this, you receive a donation for the fair value on the date of the gift. The big advantage of doing this instead of selling it and make a cash donation is not having to pay tax on the gain. If you do this discuss with your broker which securities would be best to donate. Your broker will take care of transferring the securities to your designated charity.
(2) Make a contribution to your traditional IRA or SEP (you have until April 15, 2014 to make a contribution for the 2013 tax year).
(3) Pay health insurance premiums and other medical expenses in 2013 instead of next year. The 2013 threshold for medical expenses rises to 10% of Adjusted Gross Income (7.5% for taxpayers 65 or over).
(4) Make the January payments for your mortgage, mortgage insurance (deductible in addition to interest), and 2014 property taxes in December. If you pay these by escrow, direct the mortgage holder to take them out in December.
(5) Make a contribution to your “cafeteria plan” or Health Savings Account (HSA) [flexible spending arrangement] before the end of 2013. Contributions for 2013 are limited to $2,500 to pay medical or dependent care expenses. Over-the-counter medications, other than insulin or those prescribed by a doctor, can not be paid with HSA contributions. Your contributions reduce your W-2 and self employment income and federal income and social security (or self employment tax) taxes withheld. A HSA allows you to pay medical expenses with pre-tax dollars instead of after-tax dollars [medical expense are reduced by 10% (7.5% if 65 or over)] of adjusted gross income. But be sure to use all your contributions before December 31 because any remaining amount in your account at the end of 2013 will be forfeited to your employer. But, on October 31, Treasury Secretary Jacob J. Lew said taxpayers will now be able to carry over unused amounts up to $500 to future years if your employer allows. So if you don’t expect to use the full amount in your HSA, check with your employer to see if they will approve a carryover. You may also take a deduction for a HSA contribution from after-tax income which is deductible even if you do not itemize your deductions.
(6) Sell securities with an unrealized loss to offset already realized capital gains. You can deduct capital losses in excess of capital gains up to $3,000 against other income. Any unused capital losses can be carried forward to reduce capital gains and other income in future years. Wait until 2014 to sell securities with realized gains unless you already have large losses this year. In that case, sell the securities with unrealized gains to offset losses.
(7) Increase contributions to your 401(k), 403(b), SEP, or other employer sponsored tax deferred retirement plan before the end of the year, Your contributions reduce W-2 or self-employment income and income taxes withheld and self-employment tax.
(8) Have your bonus or pay raise or expected self employment income deferred to 2014 unless you expect to be in a higher tax bracket.
(9) Pay dependent care expenses in 2013 to increase your allowable dependent care credit. Credits reduce your tax, whereas deductions reduce income subject to tax.
(10) Pay 2014 student loan interest in 2013. But to deduct it, you must be the person responsible for the loan. It is deductible even if you don’t itemize your deductions.
(11) You may exclude from income canceled debt from a qualified principal residence.
(12) Pay 2014 college tuition and fees for yourself, your spouse, and dependents in 2013. Unless you or your spouse’s education expenses are business related (these are a miscellaneous itemized deduction), they are deductible even if you do not itemize your deductions. In lieu of a deduction you may be eligible for a credit which may reduce your taxes more than a deduction.
(14) If you received a refund last year and expect to have about the same income this year, increase the number of withholding exemptions by completing a new W4. This will reduce the amount of tax withheld. No point in letting the government use your money.
(15) If you are 70 1/2 or older, you are required to take a minimum distribution from your traditional IRA every year. The amount required to be withdrawn is the balance in all IRAs at the end of the previous tax year divided by your life expectancy based on IRS mortality tables. Check with your IRA administrator regarding this. If you don’ take the required minimum distribution, the IRS will charge a penalty equal to 50% of the difference between the amount taken and the required minimum distribution. If you turned 70 1/2 during 2013, the distribution can be delayed until April 15, 2014 (that option is not available for future years). However, if you delay it until 2014, you will be taxed in 2014 on both the 2013 and 2014 distributions which could push you into a higher tax bracket and subject you to the additional 3.8% Medicare tax.
(16) If you are taking a minimum distribution from your traditional IRA, you are allowed to designate all or part of it to be donated to charity. This reduces the amount you are taxed on but you cannot also take a deduction for a charitable contribution. Check with your IRA administrator regarding this.
(17) Make energy related expenditures in 2013 to increase the allowable energy credit. The total credit for tax years 2006-2013 is limited to $500. But if you have not used the full $500 in prior years, you can use the balance in 2013. The items must be installed in your primary residence in the U.S., meet government energy-efficient ratings, and have an expected life span of at least five years. To substantiate the credit you must have the Manufacturers Certification Statement with a receipt. You can obtain information on energy items and ratings at energystar.gov. Qualifying items are:
• Insulation or insulating materials-10% of cost.
• Exterior windows or skylights-10% of cost, up to $200.
• Exterior doors-10% of cost, up to $200.
• Metal roof with pigmented coating or asphalt roof with cooling granules-10% of cost.
• Advanced main air circulating fan-up to $50.
• Natural gas, propane, or oil furnace or hot water boiler-up to $150. The item must have an “energy factor” of at least .92 or a thermal efficient rating of at least 90%.
• Electric heat pump water heater-up to $300.
• Electric heat pump, natural gas, propane, or oil water heater and central air system-up to $300.
• Biomass stove-up to $300. It must have a thermal efficient rating of at least 75%.
There are also deductions that will expire at the end of 2013, unless extended by Congress: (a) the $250 deduction per teacher in grades K-8 for classroom supplies and equipment (deductible even if you do not itemize your deductions) and (b) the itemized deduction for state and local sales taxes (in lieu of state income taxes).
There are also increases in the tax rates for 2013. The top tax rate jumps to 39.6% and the tax rates on capital gains have also increased. Your taxes may also increase because the amount allowed for exemptions is reduced (as adjusted gross income increases above certain amounts) has been reinstated starting in 2013. Two new taxes were enacted starting in 2013-an additional Medicare tax of .9% and an additional 3.8% tax on net investment income (investment income less related expenses) for taxpayers with modified adjusted gross income (adjusted gross income plus non taxable foreign income) over $200,000 ($250,000 for married filing joint). If you expect your income to be in these ranges, increase your withholding or 4th quarter estimated tax payment-due by January 15-to avoid the underpayment penalty (charged if taxes paid in are less than 100% of current year or 90% of prior year tax).